Zurich's over 40 years price-to-rent ratio is the highest globally
Swiss city Zurich has the highest price-to-rent ratio. According to a data analysis by MoneyTransfers.com, it’ll take you 40 years renting out an apartment to own it in the city. That measure is more than it’d take to own a similar size apartment anywhere in the globe.
Besides Zurich, MoneyTransfers.com’s analysis shows Hong Kong, Munich, and Paris have the highest price-to-rent ratios. These cities are followed by Sweden’s Stockholm, Singapore City, and the UK’s London.
How are interest rates affecting property values?
Highly extreme ratios indicate housing prices over-relying on inexpensive interest rates. On the whole, most of the cities the study considered have price-to-rent ratios close to or exceeding 30. Housing costs in the said cities are susceptible to sudden corrections in the event of acute interest rates rises.
Again, MoneyTransfers.com’s analysis reveals increases in price-to-rent ratios of some American cities. Nevertheless, New York, Los Angeles, Boston and Miami find themselves in the lower rungs of the listing. That’s because they have ratios of less than 25. In addition to high-interest rates, these low values indicate mild rental market regulations.
On the other hand, France’s, Germany’s, and Sweden’s rental laws lean heavily towards the tenants. Thus they obscure the real market values.
It’s important to note that higher price-to-rent multiples don’t only reflect low interest rates vis-a-vis market regulations. Rather they also reveal expected price peaks, as is the case in Zurich and Munich.
Many investors bank on capital gains compensations for low rental returns. However, if they’re in a high price-to-rent ratio market, they’re likely to suffer significant losses should those expectations not materialize.
Zurich’s booming owner-occupied housing market
The study also showed an upsurge in Zurich’s owner-occupied housing market. Beginning in the summer of 2020, the prices have appreciated by 6.5%. That’s the city’s highest yearly gain in the last eight years.
Currently, those prices are over 50% compared to their 2010 levels. Likewise, there’s been an acceleration of outstanding mortgages. Consequently, the city is well within the bubble risk zone.
Zurich records the strongest price growths across Swiss economic regions over the past decade. This has entrenched expectations of further price gains. Its market is overheating as available units keep dwindling.
Yet we shouldn’t expect a wide market correction soon. Low user costs make home ownership appealing compared to renting. Moreover, the city draws a constant stream of international immigration due to
its prime location. And it’s enjoying healthy growth in employment.
There’s reason to be wary of the city’s future. It has lost its allure due to its low affordability. Switzerland’s sub-zero interest rates are the only factor stabilizing prices.