kimberlykay
New member
Ok, as a resolution for 2022, let me try to make the decision whether to buy or rent a home in Switzerland a bit more rational. With price to rent ratios typically above 30, I find it really hard to justify buying real estate in our beautiful country. I have tried to adjust a model from Holy Potato, which is focused on Canada, to Switzerland real estate market specifics – inputs heavily borrowed from:
Below is the link to the model as google sheet.
https://docs.google.com/spreadsheets/d/1Xim19dXs-aGE74KmPIVX1k6OyePR7xa3AEmLukEVk1s/edit?usp=sharing
UPDATE: Thank you all for the constructive feedback. I got a good pointer to the Mustachian forum (https://forum.mustachianpost.com/t/clarification-on-buying-vs-renting/3589/43 ) and I found another Google sheet here https://docs.google.com/spreadsheets/d/13LT9HDL32FHw1CIZ7dLnoGCqRCvmCPWsrqjuQkUuyiA/edit?usp=sharing . I entered the same values got very similar results. My bottom line is: The biggest drivers (largest sensitivities) for the buy vs rent decisions are expected real estate price growth (RE growth), expected maintenance cost of the owned property (MC) and the expected returns of invested assets (RIA, in the rent scenario).
RE growth: If you take more pessimistic historical assumptions like Gerd Kommer at 0.9% (https://www.gerd-kommer-invest.de/wp-content/uploads/20190715-Tages-Anzeiger.pdf) then buying is immediately off the table. People often forget that there was a big real estate crisis in Switzerland in the 90ies. On the other hand, even at 1.75%, it can make sense to buy if you have a new building (low maintenance).
MC: New buildings have low costs (fair to assume 0.7%) but old buildings typically have 1.5%. This is a very important factor.
RIA: I keep my assumption at 6% as described earlier, but if you go down to 4% (conservative portfolio plus negative currency effects due to CHF appreciation), then buying is suddenly attractive again.
- http://www.holypotato.net/?p=1073
- https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/
- https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
- I currently pay CHF 3.200 rent per month
- I am considering to buy a single-family home for CHF 1.4 million
- A swiss bank offers me a 1.1% to 1.3% mortgage (first 5 y 1.10%, next 5 y 1.20%, final 20 y 1.30%)
- Will the rent increase? Rent increases are not straightforward to enforce for a landlord in Switzerland. I modelled no increase in the first 5 years, followed by 0.8% increase in the following 25 years.
- What is the annual investment return of the money put to work in the renting case? I assumed 6% annual return. I am aware that a 60/40 portfolio historically delivered higher returns, but I am skeptical about the future due to 1) low returns on bonds due to low interest rates 2) cost of currency hedging and/or lower returns of swiss equities (home bias). Does anyone have a source of historical returns of a CHF-hedged globally invested 60/40 portfolio?
- Will Swiss house prices further appreciate? I modelled 2.25% annual increase based on this: https://www.ceicdata.com/en/indicator/switzerland/house-prices-growth Does anyone have better sources?
- What will be costs of maintenance, tax and insurance for a home owner? I modeled total annual costs of 1.1% of the current house value. Reasonable?
- Finally, when I sell the house, how much do I have to put up for the sale process (broker fees, mortgage penalty etc.). I assumed 4% of the current house value. Not sure about mortgage penalties - any thoughts?
Below is the link to the model as google sheet.
https://docs.google.com/spreadsheets/d/1Xim19dXs-aGE74KmPIVX1k6OyePR7xa3AEmLukEVk1s/edit?usp=sharing
UPDATE: Thank you all for the constructive feedback. I got a good pointer to the Mustachian forum (https://forum.mustachianpost.com/t/clarification-on-buying-vs-renting/3589/43 ) and I found another Google sheet here https://docs.google.com/spreadsheets/d/13LT9HDL32FHw1CIZ7dLnoGCqRCvmCPWsrqjuQkUuyiA/edit?usp=sharing . I entered the same values got very similar results. My bottom line is: The biggest drivers (largest sensitivities) for the buy vs rent decisions are expected real estate price growth (RE growth), expected maintenance cost of the owned property (MC) and the expected returns of invested assets (RIA, in the rent scenario).
RE growth: If you take more pessimistic historical assumptions like Gerd Kommer at 0.9% (https://www.gerd-kommer-invest.de/wp-content/uploads/20190715-Tages-Anzeiger.pdf) then buying is immediately off the table. People often forget that there was a big real estate crisis in Switzerland in the 90ies. On the other hand, even at 1.75%, it can make sense to buy if you have a new building (low maintenance).
MC: New buildings have low costs (fair to assume 0.7%) but old buildings typically have 1.5%. This is a very important factor.
RIA: I keep my assumption at 6% as described earlier, but if you go down to 4% (conservative portfolio plus negative currency effects due to CHF appreciation), then buying is suddenly attractive again.