Wüestacademy

Question 1

What are the key drivers of real estate prices?

Answer 1

• interest rates
• supply & demand
• construction cost etc.

Question 2

What drives interest rates?

Answer 2

• supply and demand
• inflation
• monetary policy

Question 3

What is the role of interest rates for real estate prices?

Answer 3

Interest rates affect supply and demand which affect real estate prices: low interest rates -> higher demand -> higher prices

Question 4

Average yearly price change 2008-2022 (condominiums, SFH, MFH, rents)

Answer 4

Condominiums, SFH, MFH: 3.5+%
Rents: 0.5%

Question 5

When was the first interest rate hike since 2007?

Answer 5

June 2022

Question 6

How was the Swiss policy rate in the last years?

Answer 6

It was negative for 7 years

Question 7

How does the real estate market react compared to stock market?

Answer 7

With circa 1 year delay

Question 8

4 submarkets in real estate

Answer 8

• Asset market
• Property market
• Construction market
• Building stock

Question 9

Asset market

Answer 9

• transactions
• interest rate development
• real estate specific risk
• returns
• regulation, mortgage lending, Lex Koller

Question 10

Property market

Answer 10

• households
• population and employment
• immigration
• surface consumption
• purchasing power, willingness to pay

Question 11

Construction market

Answer 11

• construction & refurbishment
• availability of land
• regulation, spatial planning
• construction cost

Question 12

Building stock

Answer 12

• maintenance cost
• depreciation

Question 13

Summary of DiPasquale / Wheaton model

Answer 13

• modeling interaction between property market, asset market, construction market
• determination of long run equilibrium
• elegant graphical representation
• allows to perform comparative statics (effect of shock on market equilibrium)

Question 14

Property market:
Rent results from…

Answer 14

…supply and demand for residential space

Question 15

Asset market:
Price results from…

Answer 15

…willingness to pay for rental income

Question 16

Define cap rate

Answer 16

The cap rate is the percentage rate used to calculate the income value from rental income.

The cap rate is formed from a base interest rate and surcharges, it is the percentage rate used to calculate the income value from rental income.

Income value =
net income (x100) / net cap rate %

Question 17

Decisive for investments in real estate are…

Answer 17

… the attractiveness of alternative investments (bonds, stocks) and expectations of future developments.

Question 18

When bond yields rise, real estate…

Answer 18

… less attractive in relative terms.

Question 19

Construction activity depends on…

Answer 19

… construction cost and price.

Question 20

Construction investments are low despite high demand, because…

Answer 20

… of supply bottlenecks and construction price surge.

Question 21

Building stock depends on…

Answer 21

… new construction and depreciation rate

Question 22

When interest rates drop, longrun rent…

Answer 22

… decreases less than in short run

Question 23

When interest rates drop, transaction prices of MFH

Answer 23

…increase

Question 24

When interest rates drop, apartment construction activity…

Answer 24

… increases

Question 25

When interest rates drop, stock of apartments…

Answer 25

… increases

Question 26

When interest rates drop, rental prices of apartments at times of interest rate cut…

Answer 26

… stay the same

Question 27

When interest rates drop, rental prices of apartments after the lowering of interest rates (short-term adjustment)…

Answer 27

… decrease

Question 28

When interest rates drop, rental prices of apartments in the new equilibrium (long-term adjustment)…

Answer 28

… decrease

Question 29

How many years does adjustment process take (after drop of interest rates)?

Answer 29

7 years

Question 30

If a 10-year Swiss government bond yield rises by 100 basis points, in what chronological order would the individual segments react?

Answer 30

1. discount rates 2. prices for investment properties 3. construction market 4. supply on property market 5. reference interest rate 6. demand in property markets

Question 31

What happens (with rent) when population growth increases?

Answer 31

Rent increase in longrun is less than initially -> expansion along longrun supply

Question 32

Advantages of the DiPasquale / Wheaton model

Answer 32

- model shows interaction of user market, capital and construction market - suitable for determining long-term market equilibrium - allows to analyse effects of shocks (interest rates, immigration, construction cost, depreciation) - simple framework can explain various real world developments

Question 33

Reasons for high RE prices in last years

Answer 33

High population growth, high demand, low interest rates

Question 34

Disadvantages of DiPasquale /Wheaton model

Answer 34

- classical model does not allow analysis of short-term adjustments - capitalization rate is exogenous - no role for vacancy rates or market expectations - no distinction between rental and owner-occupied housing - no modeling of the search and matching process between suppliers and demanders -> various extensions address these issues at the cost of simplicity

Question 35

What is interest?

Answer 35

Interest is the consideration paid by a debtor to his creditor for granting a loan, it compensates for the borrower‘s default risk, inflation risk and the time value of money

Question 36

High interest rates increase the willingness to…

Answer 36

… save because future returns are higher

Question 37

Low interest rates increase the willingness to…

Answer 37

… make investments, as financing is favorable

Question 38

Determinants of interest rates:

Answer 38

- inflation: high inflation -> high interest rates to compensate loss of purchasing power - economy: strong GDP growth -> high interest rates - demographics: increase in life expectancy -> lower rates -> desire to save - monetary policy: price stability -> high interest rates slow down investment and thus economic development and inflationary pressure

Question 39

SNB policy rate

Answer 39

Indicates the conditions under which credit institutions can borrow money from the SNB

Question 40

SARON

Answer 40

Swiss Average Rate Overnight: overnight interest rate between banks, moves closely to policy rate

Question 41

What drives government bond yields?

Answer 41

- expected inflation - policy rate - financial market: investment pressure, risk aversion, savings vs. investments - other premiums, e.g. illiquidity

Question 42

Types of mortgage rates

Answer 42

- SARON mortgage: term of 3 years with variable SARON as base rate with +0.9 bp margin - 10-year fixed rate mortgage

Question 43

Importance of interest rates for real estate prices

Answer 43

- interest rates determine borrowing costs and thus influence demand for ownership property - interest rates influence the discount rate and thus the property value for owners - in an inflationary environment with rising wages and interest rates, rents typically rise as well

Question 44

What happens in the event of an inflation shock?

Answer 44

- yields on bonds rise - policy rate rises - prices of investment properties fall - existing rents rise

Question 45

Bond yields follow…

Answer 45

… inflation movement

Question 46

Why have interest rates decreased a) in general over the last 10 years b) in 2020?

Answer 46

a) the SNB first imposed a negative interest rate of -0.75% in 2015 when it was forced to abandon a policy of defending the Swiss franc with a peg to the euro b) because of the slowing economic growth related to Covid-19