EMR June 2022
Recently, the global economy has started losing momentum due to the unacceptable Russian invasion of Ukraine as well as the sharp increase in inflation and also interest rates. We take these developments, along with currency adjustments, as confirmation of our preference for investing in the Swiss market. Therefore, here we will focus on the Swiss mortgage market.
THE RECENT PAST
The chart of mortgage rates shows that there was a somewhat steep, choppy decline between 2007 and 2011/2013, followed by relatively stable, low interest rates until early 2021 and a fairly steep rise until 2022! It is striking that the 10- and 15-year interest rates have risen significantly more than the short-term interest rates.
The thorny question implicit in the graph on mortgage rates currently relates to the main drivers of the recent price increase. Following the argument made in the May 2022 EMR, we would argue that “aggregate supply disruptions” are the key determinant of the short- to medium-term outlook. Determinants of crude oil price increases include both the impact of the Covid 19 pandemic and the Russian invasion of Ukraine. However, one should also take into account the recent monetary policy interventions by central banks, the interactions of which will ensure continued volatility in the financial markets.
As far as the development of inflation is concerned, we would like to point to the similarly strong increase in consumer prices in the United States and the EU, while the Swiss CPI is still lagging well behind. The U.S. CPI rose to 8.6% in May 2022, after reaching a low of 0.24% in May 2020. A similar increase can be seen in the Eurozone consumer prices, which reached 8.1% in May 2022. Swiss consumer prices are dancing on a different planet, rising to 2.94% in May 2022. These intrinsic developments have led us for some time to focus our allocation on the domestic market in order to reduce volatility and significant losses.
FINDINGS FOR INVESTORS
Assuming that the leading central banks (e.g., FED, ECB and BoE) will continue to push up interest rates, while the SNB is likely to continue to lag behind, we ask ourselves what these developments should mean for the Swiss mortgage market?
Our macroeconomic framework assumes that the rise in interest rates in Switzerland will obviously be much more moderate than in the markets of our trading partners. The decisive factor is and remains a moderate increase in the cost of accessing credit. In addition, the CHF is likely to appreciate or at least not depreciate significantly.
At this juncture we suggest clients to contact Swisschange in order to discuss the best policy for your specific portfolio. We believe that a 5 to 7 year horizon could be appropriate.
Comments are welcome.