On June 20, 2024, the Swiss National Bank (SNB) announced a reduction of its key interest rate by 25 basis points, bringing it to 1.25%. This decrease follows a similar cut made in March of the same year. This decision is part of an objective to stimulate economic growth while keeping inflation under control. Although this rate cut is bad news for savers, it represents a growth opportunity for the real estate market. Here are the consequences of such a decision for investors, tenants, and future homeowners.
Key Interest Rate: What Is It?
By definition, a key interest rate is an interest rate set by a country’s central bank or a monetary union (such as the European Central Bank). This rate helps regulate economic activity because it applies to loans granted to commercial banks (banking institutions or traditional banks). Indeed, when these banks need liquidity, they borrow money from the central bank, which charges an interest rate.
The key interest rate has a direct influence on a country’s economic activity. When it decreases, loans become more advantageous for borrowers. Borrowers are then more inclined to invest, which stimulates economic growth in the region.
Conversely, when the rate increases, interest rates rise. Households and businesses then face higher costs. Their purchasing power and borrowing capacity decrease. Demand becomes scarcer, significantly impacting consumption levels.
Key Interest Rate Cut: What Are the Consequences for Swiss Real Estate?
The SNB’s decision to lower the key interest rate has many positive consequences for the real estate sector.
Blocked for several years due to high interest rates, this market now has promising prospects, much to the delight of individuals and investors. Here are the impacts the rate cut has on real estate.
More Attractive Interest Rates
Thanks to the rate cut, banks can offer more attractive interest rates to borrowers, as they can obtain credit at a lower cost from the SNB.
As a result, individuals and professionals can now secure loans under more favorable conditions. This makes acquiring real estate possible without the risk of loan rejection or needing substantial savings.
Increased Demand
The drop in interest rates also leads to a rise in demand in the real estate sector. Since borrowing costs are lower, borrowers are more inclined to opt for a fixed-rate mortgage. Specifically, this type of financing protects against future interest rate increases.
With more favorable purchasing and borrowing conditions, households and investors tend to revive their real estate projects.
Lower Rents
A cut in the key interest rate can lead to a decrease in rents, although this effect is not immediate. In Switzerland, rents are based on reference interest rates (which themselves are calculated according to the key interest rate), so changes will not be visible for several months.
However, clients with a SARON mortgage (an open-ended mortgage with a variable interest rate) may see changes sooner than those with fixed-rate mortgages. SARON mortgages continuously adjust to market fluctuations and developments.
