Renting versus owning: Is it rational to buy a primary residential property anywhere in Switzerland?

[Rebecca]

I agree with JL Collins that a house/flat is a terrible "investment". At best a primary residential property is usually an expensive indulgence.

There are various methods for calculating renting versus buying. FIRECracker and her husband retired early in part by not buying overpriced real estate in their native Canada. Her formulas involve comparing equity trapped in a home compared to what it could earn invested in her stock portfolio.

JL Collins offers as usual a simpler approach that is easy to calculate. (See the "Post Script" section of his article to review the formulas.):

House price/Annual rent.

If the result is 21+ renting is better

Between 16-20 it’s a toss-up

less than 16 is a vote to buy

Using our number: $330,000/$24,000 = 13.75 This says we should buy, or in our case stay put.

I like numbers of a lot so here a few examples of calculations using real-world examples. These examples use JL Collins' formula as described above.

Zürich Area 3.5 Room Apartment
Purchase price: 885,000 CHF
Annual rent: 27,540 CHF (2,295 CHF per month)
Purchase price / annual rent: 31.1
In other words one would have to rent this apartment for 31 years to equal the value of the property.

Buffalo, New York, United States Single Family Home
Purchase price: $300,000
Annual rent: $24,000 ($2,000 per month)
Purchase price / annual rent: 12.5
One would have to rent the house for only 12.5 years to equal the value of the property.

I am curious if there is a home anywhere in Switzerland that has a price/rent quotient under 16. There are a few cheap houses in remote mountain towns but they are priced low due to their dilapidated condition.

My question to the Swiss FI community:
Is there a region or municipality anywhere in Switzerland where the property price / annual rent quotient is under 16?

Please let me know because maybe then I will feel comfortable buying a residential property in that region if it is a rational decision. I consider buying a home in my current municipality (near Zürich) to be unwise financially.

 

[Baptiste Wicht]

I think this formula does not work well in Switzerland. Indeed, we can keep 65% of the debt forever, so we don't have to pay back the full value. This makes it quite different from most other countries.

Is there a region or municipality anywhere in Switzerland where the property price / rent quotient is under 16?

Maybe in Jura?

I like being rational as well, but buying a house is also a sentimental experience. If you are doing it purely financially, it's good to only look at numbers. But if you want THE house for you, numbers are not enough

 

[Rebecca]

I agree that buying a house definitely has a strong emotional element. Many people gain fulfillment, identity, and social status from being a "homeowner" (debtor).

The issue is that their emotion can be dangerous financially. I speak from experience. When I was younger I fell for the "American Dream" and purchased a house for $115,000 (I know that is pocket change compared to Swiss real estate ). I had an emotional need to prove to society that I was an adult and a "normal" upwardly mobile middle-class person. Every other adult in my life told me to purchase a house rather than waste my money on rent.

And then came the 2008 United States housing bubble crash and ensuing major recession. Long story short I ended up losing $20,000 when I sold the property. If I had instead invested my mortgage down payment into a low-cost index fund I would have been wealthier rather than poorer.

If the Swiss real estate bubble pops it will be devastating for Swiss homeowners (debtors). They could be underwater on their mortgages by hundreds of thousands of francs.

Thanks for the tip, I'll have to check out real estate in Jura and calculate the home price to annual rent quotients.

 

[Baptiste Wicht]

It's emotional, but the emotions should not erase all the rational thinking, indeed. That's a difficult balance in numerous instances.
Sorry to hear about your story It could happen indeed in Switzerland (or anywhere). It does not hurt to be prudent.