“I know a couple in Lausanne, Switzerland, whose combined income is certainly over $500k. They rent. Many Swiss cities are renter cities.” – Jeff Murdock at VREAA 9 Dec 2011 8:19am
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“The Swiss have a very well balanced real estate system. They live in a country with limited land and thus, the ownership and use of land is somewhat regulated and it is an asset to be consumed and not “invested in” or traded. This creates a very very stable market. You’ll see that the value of Swiss real estate has barely gone up in the past 20 years which is not so bad in a country where there has been almost no inflation. However, here are some items that keep their real estate in check.
1.) 80% of people rent. It is an asset to be consumed and it’s value is derived from the rent.
2.) Rent is a factor of property value/interest rates and is controlled and regulated.
3.) 100% of the maintenance risk lies with the tenants. Costs are allocated throughout the year in addition to the base regulated rent. In the event of a major item – it is split up between the tenants.
4.) If you actually own, you can deduct your interest – however- even if you have no mortgage (and thus no deduction) you also have an income inclusion which represents hypothetical rental income to yourself. You have to impute rent at say 4% of the property value each year. This is added to your income and you pay income tax on it.
5.) Foreign ownership restrictions are everywhere. And Foreigners have restrictions on the real estate that they dispose and they only allowed to sell for a gain in restricted circumstances.
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A few other Swiss things to note. The pensions are very very rich and well funded. Up to 30% of your income each year goes into the pension system. Thus – pension funds are massive and retired people are very very wealthy. Where does the pension money go? To own the real estate buildings that people rent – since this is guaranteed and almost riskless cash flow (cash flow is risk reduced because rents are hardwired to property value and the maintenance and repair costs flow to tenants).
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Another item is that since all the properties are owned by pension funds and insurance companies, you will never be asked to move – – in fact – most Swiss never move. It is too expensive (when you leave – you must return the property in the original condition you received it – no such thing as normal wear and tear. Plus – your movers are not cheap either – over 100/hour plus equipment rental costs).
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All this means that Real Estate fulfills its function of providing housing stock as a consumable. Cities are priced in a rational way and so is real estate. Owning v. renting is not really much different in terms of risk. Vancouver could learn a lot from this. I am a strong advocate of implementing some type of limited foreign ownership restriction. Where you are dealing with a limited resource – you need to have the resource used for the benefit of the operation of the city – and not some type of traded commodity.”
- ZRH2YVR at VREAA 10 Dec 2011 8:11pm
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“I thought it was funny that they make $500,000 a year and still have to rent – mega lol”
- tmda commenting at RETalks 10 Dec 2011 7:53am on Jeff Murdock’s comment above
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Thanks to ZRH2YVR for the description of the very sensible Swiss system.
In Vancouver we do things very differently, of course. Ownership culture is entrenched. The speculative mania has caused each and every property to be viewed at least partly as a financial instrument.
- vreaa
The aspect of the Swiss system described here that is not to my liking is the difficulty/cost in moving. Labour mobility, in my mind, is a cornerstone of liberty.
Sure, but how ‘free’ are a people chained by an ownership cult to overpriced RE? Or on a hamster wheel to hell when it comes to debt servicing?
had you bought when you could before you started this blog in Feb 2008, you would be chained happily as well like the other vancouverites (well, ETB for one!). unfortunate for you, lot of saliva but could not grow a pair! need not worry, dec 21 2012 is just a bit more a year away.
Labour mobility has its own set of downsides despite the gains in efficiency and in individual liberty – Witness the problems occurring as a result of movement of workers within the EU and indeed migrant workers to Canada in the past. The net effects on communities of people staying put and thus committing longer term to a community may be of more benefit to people’s lives as a whole, if not to the economy or to a few highly specialized individuals.
people already have an inclination to stay put (familiarity, social network, laziness, local pride, …) – things need to get pretty bad before they start moving in large numbers
No need to move when you can drive accross the whole country in 2.5 hours. There is almost no place that is no within commuting distance. As well – no unemployment so not really a concept of having to redistribute labour to where it is needed. People live as a family in the same village for 800 years.
There will be no ‘moving’ in Vancouver when prices roll over.
I rent, mostly because it means that I am neither chained nor on a hamster wheel.
Robert, thanks for framing this in terms of ‘freedom’; it’s thought-provoking. It’s interesting to consider the overpriced Vancouver RE market in terms of personal ‘freedom’. Who gains ‘freedom’; who doesn’t?
One type of ‘freedom’ the current market facilitates is that afforded to owners with equity, who can sell and leave (or downsize), or who could borrow against their equity and deploy those funds.
The market has also offered 10 years of good income to those in the industry, which allowed ‘freedoms’ of sorts – but that period of easy money may have already drawn to a close. The knock-on effects of that easy-money expansion had a temporary effect on the economy as a whole, so some people probably had some ‘freedom’ facilitated by that windfall income.
The current state of affairs offers no real tangible freedom to long term owners unprepared to borrow against equity or, indeed, to landlords, who have a meagre deal of it with low cap rates.
Renters have the freedom to come and go, at reasonable rates, but often for substandard wares. ‘Freer’ than the Swiss system, perhaps, but limited by big gaps in certain sectors of the rental market (witness wannabe renter professional families). We suspect citizens like reader Vesta (“Writer/teacher/editor (me) and UBC humanities professor (husband)”) would be better served, and ‘freer’ under the Swiss system.
And, in terms of Canadian citizens moving to Vancouver, to live at reasonable cost in accommodation that offers fair value, there is little ‘freedom’ in that at all. And, consequently, our economy and society here is not ‘free’ to make use of all of the benefits that such citizens would bring.
The market is, overall, restrictive of many ‘freedoms’.
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[Note to constitutional scholars and semanticians: We've used 'freedoms' with our use of 'freedom'. We are aware that 'freedom' isn't simply the capacity to do things with wealth.]
This is a really interesting post and a good rejoinder to those who compare housing prices in Vancouver to those in NYC, London, and other “world-class” cities (whatever that means). House-price comparisons are meaningless without information about home-ownership rates and how home-ownership is distributed relative to income.
ZRH2YVR, thanks for the interesting info. I knew that they rent, but I didn’t know why they rent.
FWIW, the couple is a full professor at EPFL and a medical doctor. Starting salaries for assistant professors at EPFL are around $175k. These salaries sound impressive, but from what I understand, the cost of living there is quite high. Rental rates however seem not too different from Vancouver.
I rented in Zurich for 4,650 (approx 5000) / month including maintenance costs. It was a nice property and difficult to compare to our poorly constructed properties here. Everything there is designed to standup for 100′s of years. 8inch thick cement walls, steel beam and cement construction on their low-rise buildings (generally up to 5 stories). Because everyone rents – - really all types of properties of all sizes and prices can be rented. It’s not uncommon for a wealthy Swiss person to rent for 20,000 per month their entire life (while their $100 M investment portfolio keeps them wealthy). Real estate is to be consumed or to generate cash flow and both are inequilibrium.
Now in Van, I rent a fairly nice place in a 4 year old high-rise and pay between 3-4K / month. Cap rate is 1.5%. In Zurich, either the value of the property would be 66% lower or my rent would be closer to $9,000 per month.
it’s not a perfect society but over 500 years – they have made their small space work.
http://www.bloomberg.com/news/2011-12-08/swiss-millionaires-elbow-insurers-out-of-geneva-zurich-property-market.html
“Private investors often have different objectives such as capital protection and they can therefore accept much lower returns than institutional investors,” said Daniel Haecki, an associate at Jones Lang LaSalle Inc. (JLL) in Zurich.
While Swiss insurers, which have invested about 13 percent of their assets in property, target real-estate returns of about 5.7 percent, they are struggling to find affordable projects, Jones Lang LaSalle, the world’s second-largest publicly traded real-estate broker, said in a September survey.
The Swiss have had their past bouts with speculation, the worst about 20 years ago. Even today it appears as if not is all zigactly ferpect
http://www.swissinfo.ch/eng/swiss_news/Rising_house_prices_heading_towards_a_wall_.html?cid=29675216
Great link. The one thing that should be noted is that if you go back to 2002, the prices were much lower than1990 so much of the decade has been spent getting it back to “zero” and then there has been growth on top of that. Also – you can see the ownership rates have gone up. Given that borrowing is close to zero percent now, you can get interest only mortgages and your rent is going to be somewhere closer to 3% cap rate – the value of the properties has to go up.
the pivotal issue for vanRE isn’t foreign ownership – but it seems to be a popular concept. if you have a sound currency, or at least if you pursue sound monetary policy and lending practices, it is not possible to bid up prices with credit – there just won’t be that much available for wackiness. the swiss, or anyone else who have done better wrt these, do not have ppty bubbles. it also helps enormously that enough of the public understand the importance of being economically and financially responsible. a bunch of savvy, risk-averse folks can wander into the wildest casino on the planet with the mildest of outcomes.
thx, for the link jesse. seems i am assigning swiss to much ‘credit’. wonder how much of that is being prevented by their foreign ownership curbs?
http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/stagnant-incomes-push-debt-burden-higher/article2269210/
Pivotal issue for VanRE is debt.
I am very impressed with the Swiss approach. Tsur Somerville, Sandy Garrosino, Gregor Robertson, Christy Clark, care to comment on this approach? Someone should write this up in the Georgia Straight pronto.
The fact that Switzerland is a major hub of financial services and insurance should say something.
The fact that Switzerland is a major hub of financial services and insurance should say something.
That they don’t like to get their hands dirty?
They’re the centre of Nestle’s European food processing. They’re also one of the biggest industrial and pharmaceutical manufacturers. Not just a FIRE economy, plenty of STEM.
No one could accuse the Swiss of failing to get their hands dirty, Mr. Dudek…
http://tinyurl.com/77ngmv6
Best of all, when you’re done – you get to take home/keep one of these…
http://tinyurl.com/82alqfu
PS – somehow, I don’t think that would work out so well in Abbotsford. Personally, I prefer their chocolate and watches.
Some interesting data on mother tongue and Vancouver neighbourhoods.
http://vancouvercondo.info/2011/12/how-vancouver-neighbourhoods-are-divided.html/comment-page-1#comment-139655
One must wonder whether, when looking for signs of some potential paradigm shift in neighbourhood makeup, many parts of the City are decades ahead of those who barely took notice until relatively recently. Further, identified mother tongue other than English seems not to carry past the first generation of immigration, which should be obvious to the point of triviality.
well, at least the UEL didn’t get fully co-opted this time around
http://pricetags.wordpress.com/2011/12/13/why-city-rankings-always-get-it-wrong/
In case you missed this gem…
http://www.citytv.com/toronto/citynews/videos/174666
“Is housing bubble about to burst?” Tonight on CTV…
Great stuff.
The bullish realtor seems more confident.
Yeah, listening to the younger bullish realtor after the older more experience one was quite amusing… we’ll see who’ll be right, I wouldn’t bet on the young horse though!
“Robert, thanks for framing this in terms of ‘freedom’; it’s thought-provoking. It’s interesting to consider the overpriced Vancouver RE market in terms of personal ‘freedom’. Who gains ‘freedom’; who doesn’t?”
I agree labour mobility = freedom.
I’d say in Van owners assume all the risk (large mortgages that are not even fixed interest) and banks get most of the freedom & bennies. They got no skin in the game.
Yes there are huge solvency risks. That’s a big part of what killed the US’s groove and something to pay attention to in the years ahead. Bank lending isn’t looking to become any looser.
“The Gated City”
Cities are too expensive for middle class families to afford.
http://video.economist.com/?&fr_story=87e63aead70226fd5ece97a6179d244384168ac1&autoplay=true&skin=oneclip&rf=ev
The Gated City (Kindle Single)
@jesse — you write “One must wonder whether, when looking for signs of some potential paradigm shift in neighbourhood makeup, many parts of the City are decades ahead of those who barely took notice until relatively recently.”
Not sure what you mean by “those who barely took notice until relatively recently.” Dramatic changes in Dunbar/Southlands and Kerrisdale, which were always overwhelmingly “English-mother-tongue” places, have been relatively recent. Don’t forget that this interesting and useful “mother tongue” data is from 2006. Many of the most dramatic changes I’ve witnessed in Kerrisdale (where I’ve lived for 17 years) have occurred since then. I myself find Kerrisdale much more interesting now than it was when I first moved there — walking down the main drag, one is as likely to hear Chinese as English, I’d say about a third of commercial establishments now have signage in Chinese, etc. The commercial area in Dunbar is still mostly Caucasian. I’m very enthusiastically for the vibrancy of racial integration. What I find unpromising is home-ownership being available only to the very rich (or being used mostly for speculation or even hoarding), which in my opinion represents the destructive aspect of recent changes. (Please note that I completely understand reckless speculative-mania behaviour that undermines the city’s stability and health is practiced by people here of all backgrounds!) But in a previous post where I referred to the makeup of the street where I lived for a dozen of those 17 years, I noted that the economic demographics were originally much more varied — tradespeople (a locksmith, a carpenter, an exterminator, a sign-maker), renters, nurses, music teachers, high-school teachers, and elderly retired couples who were not wealthy all lived on my block. Now I would venture that no one in those professions could afford to buy any house there without some extraordinary amount of capital or without going into an extraordinary amount of debt. Furthermore, finding any rentals at all, much less decent ones with knowledgeable landlords (as opposed to amateur speculators), has become incredibly difficult. This is what bothers me.
Thanks for including tmda ‘s comment as part of this post. The stigma attached to renting that you have highlighted over and over again in this blog is one of the more puzzling things to me about real estate bubbles. In many other places in the world that are full of high earners, not only Switzerland renting a property is standard practice. I personally know of lots of people that live in New York and London for example that make well in excess of $500,000 a year that rent and have so for years. For them RE is a consumable, and there is no stigma attached at all to renting.