Investing in times of crisis and inflation: An idea to forget?
Investing in times of crisis and inflation: An idea to forget?
In the face of health or geopolitical crises and rising inflation, the economy finds itself in a whirlwind, impacting every sector. Amid such instability, the idea of investing to grow your savings might seem riskier than ever. But is it wise to sideline investing during turbulent times? Not necessarily—Swiss real estate continues to stand out as a safe harbor, offering numerous investment opportunities with limited risk, even amidst crises. Let’s delve deeper with Foxstone.
The Unfavorable Climate of Crisis and Inflation for Investments
In a free-market economy, the prices of goods and services are in constant flux. When we see a general and sustained increase in prices, we’re facing inflation. This, coupled with ongoing crises, spells a challenging environment for investors—except in the realm of real estate.
Understanding Money Depreciation and Its Causes
A prolonged rise in general prices leads to the diminishing purchasing power of money—suddenly, your franc stretches less than it used to, limiting how much you can buy.
What’s driving this erosion of money’s value? Here’s a brief rundown:
- Demand-led inflation: When the overall demand for goods and services outpaces supply, scarcity ensues, driving prices up as consumers are willing to pay more for what they desire.
- Cost-driven inflation: Rising production costs lead companies to hike their selling prices to maintain profit margins.
- Money supply inflation: An excess of money in circulation, compared to economic growth, can trigger inflation.
The Consumer Price Index (CPI) in Switzerland serves as a gauge for price changes in goods and services consumed by households, incorporating over 100,000 items across various categories. The cost of houding accounts for almost 20% of the basket’s value, so even minor shifts in rental costs significantly impact the CPI.
Health Crisis and War in Ukraine: Catalysts for Inflation
The long-standing stability of Europe’s inflation was disrupted by the Covid-19 pandemic, ushering in an era of escalated prices following the crisis. The juxtaposition of dwindling supply against a surge in demand for travel, dining out, and broader consumption, post-restriction savings, has compelled businesses to adjust prices upwards. This scenario is further compounded by sluggish supply chains and surging energy costs, with the conflict between Russia and Ukraine intensifying inflationary pressures.
Inflation’s Adverse Impact on Financial Investments
In efforts to halt the inflationary momentum and mitigate its effects, central banks have resorted to increasing their benchmark interest rates. This tactic aims to discourage borrowing, thereby diminishing money circulation, which poses significant implications for investors, influencing the patterns of savings, investments, and consumption among households and businesses. Typically, inflation coupled with monetary tightening adversely affects stock markets, presenting a dire scenario for investors faced with the potential for substantial financial losses.
The Swiss Real Estate Market in the Face of Inflationary Pressures
How has the Swiss residential real estate sector responded to the challenges of inflation and economic crisis? To say it has remained completely unaffected would be misleading, as the sector has indeed navigated through some economic turbulence.
Initially, in a move to combat inflation, the Swiss National Bank (SNB) adjusted its benchmark interest rate in June 2022 for the first time since 2007, setting it at -0.25%. This significant action, aimed at curbing inflation, was followed by a series of rate hikes, which saw the rate soar to 1.75% by June 2023, where it has since remained. This escalation in interest rates has made mortgage conditions less appealing for potential homeowners.
As a direct result of these rate adjustments, the demand for home ownership sharply declined. This shift is evidenced by a noticeable reduction in the number of search subscriptions on real estate platforms, with a study by Raiffeisen Bank in the third quarter of 2023 highlighting that demand had nearly halved over 24 months. The same period saw a decrease in real estate transactions due to a constricted supply, with the rising cost of borrowing leading to a 25% drop in sales volumes, as reported by Le Temps.
Additionally, the surge in material and energy prices has impacted the construction industry across Europe, with Switzerland feeling its effects. According to Fredy Hasenmaile, Chief Economist at Raiffeisen Switzerland, the number of building permits has hit a 20-year low, indicating a construction sector slowdown.
Investing in Swiss Real Estate: A Wise Defense Against Inflation
Despite these challenges, does it mean that investing in Swiss real estate is unwise? Absolutely not. The Swiss real estate market is known for its resilience and remains buoyant, even amid economic crises. The market’s solid foundation provides an effective shield against inflationary impacts, making it an attractive option for investors.
The Resilience of the Swiss Economy and Currency in the Face of Inflation
The Swiss economy’s enduring strength is evident, with inflation rates significantly lower than elsewhere. The Harmonized Index of Consumer Prices (HICP) allows for comparison with other European countries, showcasing Switzerland’s favorable position.
As of January 2024, the HICP’s annual change was 1.25% in Switzerland, compared to 2.8% in the eurozone. During the inflation peak in 2022, Switzerland’s rate was only 2.7%, while surrounding countries faced rates as high as 8.4% (source: OFS).
The Swiss franc, viewed as a safe haven, provides a solid defense against rising prices, appreciating in value and offsetting the impact of imported inflation.
Resilience and Stability in Swiss Real Estate
Choosing Swiss real estate is not merely prudent; it’s a strategy resilient to inflation and economic disturbances. Despite a downturn in transaction volumes in 2023, the market’s stability is unshaken. Property prices have continued to rise, with an average annual increase of 2.2% in owned housing (source: OFS).
Switzerland’s favorable demographic trends, including record net immigration in 2023, support the market’s vitality. A study by Banque Raiffeisen predicts sustained growth, bolstered by an economy more robust than its neighbors, mitigating rental vacancy risks.
Rental market adjustments, through CPI-indexed leases, allow investors to align rent increases with inflation, safeguarding returns. Furthermore, new rents saw nearly a 5% increase in 2023, with ongoing housing shortages likely to push rents higher, ensuring market stability.
A Safe Haven from Stock Market Volatility
Real estate’s independence from financial market fluctuations offers investors a stable, low-volatility option, particularly valuable during inflationary periods when stock prices are prone to unpredictable declines. The anticipated reduction in benchmark interest rates from June 2024 further enhances real estate’s appeal for capital growth.
Foxstone: Your Partner for Low-Risk Investments During Uncertain Times
Foxstone stands as the ideal ally for those seeking secure real estate investment opportunities in Switzerland. Our crowdfunding platform makes investing accessible from CHF 10,000, providing a comprehensive service and diverse investment choices.
We offer participative investment in co-ownership, allowing investors to collectively purchase and own rented properties, ensuring steady returns and simplified management. Our crowdlending option, offering loans to developers for specific projects, provides another avenue for investment, with returns in the form of interest and principal repayment over 1 to 3 years.
Foxstone’s projects, selected by experts mindful of economic conditions, offer a strategic way to diversify and minimize risk. Join us in navigating the real estate investment landscape intelligently and sustainably, even amid crisis and inflation.
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