Many rents likely to rise again in spring 2024
Published: Monday, Nov 27th 2023, 11:21
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Next Friday, the so-called mortgage reference interest rate is likely to rise again. Many tenants will therefore have to prepare for higher rents again.
At the beginning of June this year, the reference interest rate rose for the first time in its history. This resulted in higher rents in the fall of this year. And now the next rent shock is already imminent.
Specifically, the next round of rent increases is expected in spring 2024. This does not bode well for the wallets of many consumers. In addition to inflation, higher energy costs and, above all, the surge in health insurance costs, wallets will be hit even harder in the new year.
Higher mortgage rates as a reason
The main reason for the rise in rents is the mechanism of the mortgage reference interest rate. Because mortgage rates have fallen from their historic lows in the course of the interest rate turnaround, there is a very high probability that the reference interest rate will also rise.
In its last assessment in September, the Federal Office for Housing (FHO) left the interest rate at 1.50 percent. However, the average interest rate on domestic mortgages on which the reference interest rate is based rose from 1.44% to 1.59%.
If the value calculated on a quarterly basis now rises only slightly to 1.62%, the reference interest rate will be raised to 1.75%. In the calculation, it is rounded up or down to the nearest quarter of a percent.
Rents rise by 3 percent
This is bad news for tenants. This is because if the reference interest rate is increased by 0.25 percentage points, landlords are allowed to raise rents by 3.0% - provided they have passed on the previous reductions.
As a reminder, the rate was 3.5 percent when it was introduced in 2008, after which it gradually fell. According to an estimate by Zürcher Kantonalbank, around 60 percent of all tenancies are currently based on the current reference interest rate. The proportion of those affected has therefore risen by around 10 percentage points since the last increase.
In addition to the reference interest rate, landlords can also pass on 40 percent of inflation and so-called "general cost increases" to tenants on a flat-rate basis. However, as the last rent adjustment was only a few months ago and inflation has also fallen significantly in the meantime, this effect is likely to be less pronounced this time.
Last increase for the time being
After all, analysts surveyed by the news agency AWP agree that this is likely to be the last increase in the reference interest rate in the medium term. They do not expect any further rent increases in 2024 at least.
However, according to a current forecast by ZKB, the picture for tenants is less rosy. According to this, the reference interest rate is likely to rise to 2.50 percent by 2028. This would mean another three rounds of rent increases in 2025, 2026 and 2027.
In other scenarios, ZKB is even forecasting an increase to as low as 2.75 or 2.25 percent. "The future development of the reference interest rate depends on macroeconomic developments and is subject to uncertainty," said ZKB chief economist David Marmet, explaining the range of forecasts.
Meanwhile, Raiffeisen chief economist Fredy Hasenmaile expects the reference interest rate to pause for several years, probably until 2027. As he does not expect the Swiss National Bank (SNB) to raise its key interest rate any further, the average interest rate on which the reference interest rate is based is likely to rise only slowly. "Whether the reference interest rate will rise further to 2.0% is uncertain and depends on the medium-term development of the interest rate landscape," Hasenmaile continues.
Federal Council examines short-term countermeasures
The Federal Council is aware of the problem of rising interest rates for consumers. It therefore wants to take measures that can be implemented in the short term to cushion the rise in rents, as it announced last Wednesday.
Specifically, the proposals stipulate that only 28% of inflation may be passed on. In addition, it would no longer be permissible to pass on general cost increases across the board unless the actual extent can be proven.
Administrative adjustments are also planned. For example, the form for notifying the initial rent is to be supplemented with the latest and newly applicable reference interest rate and inflation rate.
It is also proposed to add a note to the form for the notification of rent increases stating that "when contesting rent increases, absolute cost criteria such as a translated income or the local and neighborhood custom can also be put forward."
A consultation is planned for next summer for the amendment of the ordinance. This would therefore only affect subsequent possible increases. A scientific study is also to be carried out to examine whether the current rent model still corresponds to the current realities of real estate financing.
Inflation continues to be driven
As rents play a significant role in the calculation of inflation in Switzerland, inflation is likely to continue to be driven up in 2024. The analysts surveyed expect inflation to rise by 0.4 percentage points. This is likely to impact the calculation in May 2024 for the first time.
This could then put further pressure on the SNB to push inflation below the 2.0% level in the long term. According to Hasenmaile, inflation is likely to rise back towards the 2% threshold. The most recent inflation rate was 1.7% in October, having been well above 3% at the beginning of the year.
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