The changed parameters on the mortgage market are reflected in numerous factors. This makes it all the more worthwhile to take a closer look at the segment. In the summary below, we outline the conclusions that can be drawn from this and the resulting opportunities.
Despite a significant nominal rise in interest rates (which is the relevant factor for mortgages), prices have remained surprisingly resilient. Unexpected inflation, the potential for rent increases thanks to higher interest rates and the very strong demand situation, at least in the residential sector, are supporting the market. As was to be expected, investment properties suffered somewhat more than owner-occupied housing. In our view, however, future risks have risen as the buffer for unexpected adverse developments has become smaller (e.g. unexpected further interest rate hikes).
From the perspective of mortgage investors, the credit side is currently still in the green range. Nevertheless, higher loans should be reduced or avoided. Due to higher interest rate sensitivity, investment properties remain rather underweight in our investment solution.
End of negative interest rates and relative attractiveness
Mortgage investments were practically the only CHF investment able to avoid negative interest rates. For the time being, this argument in favour of mortgages no longer applies. The latter is also supported by the fact that even before the negative interest rate period, a premium of 20 to 30 basis points could be earned after costs compared to the bond market in a long-term comparison.
Mortgages now benefit from two special effects
Firstly, swap rates are currently elevated compared to all bonds. For example, the return (before costs) of our mortgage investment group is 2.48% compared to the return of the Swiss Bond Index (SBI) of 1.56% (both as at 31/8/23). Secondly, competition in the mortgage market is expected to become less intense in the next two to four years, which will support mortgage margins. Mortgages will outperform bonds in the longer term – with lower volatility because duration is always a little shorter.
Displaced swap rates
CHF swap yields are around 15 basis points higher than the long-term average (compared to Swiss Confederation bonds, Pfandbriefe and corporate bonds). Mortgage rates are based on swap rates and are therefore very appealing compared to bonds.