7 disadvantages of owning real estate

Many people dream of owning their own home. It is an emotional topic. Less well known are the downsides of owning real estate. These go far beyond the unpopular imputed rental value, i.e. paying tax on income that you don't actually earn. The following seven shortcomings should be noted:

1. Illiquid investment

A home is a very illiquid form of asset. If you need money, you cannot simply sell part of it. Increasing the mortgage is associated with inconvenience and costs. And it is often not even possible to increase the mortgage on your concrete property. Many divorcees and pensioners can tell you a thing or two about this. Their income is often not sufficient to meet the so-called affordability calculation. In other words, they cannot get an additional loan.

2. Concentration risk

Anyone who can afford to buy their own home often has to spend a large part of their savings on it. With a property you are immobile, tied to your home. If the environment changes, this can have a negative impact on the value of a property. Tax increases in the local municipality, increasing traffic noise, shadows cast by new buildings in the neighborhood, a reduction in public services or unwelcome odor emissions from the nearby factory are just some of the possible causes of a reduction in value.

3. Underestimated interest rate risks

The interest rate risks must be taken into account. Many homeowners use so-called money market mortgages because they seem cheap compared to long-term fixed-rate mortgages. The money market interest rate SARON (Swiss Average Rate Overnight) serves as the basis for calculating this. This is currently around 0.2 percent. Added to this is the bank's margin, for example 0.7 percent. The total interest burden of 0.9 percent therefore seems relatively attractive for homeowners. The catch is that housing costs are likely to rise sharply if the SNB raises the prime rate again one day. Anyone who has fixed their interest costs with a fixed-rate mortgage over the long term will not suffer directly from rising capital costs. However, the shock when refinancing is likely to be all the greater.

4. Little freedom

If life circumstances change, things get complicated. As a tenant, you can quickly pull up stakes, move in with your girlfriend within months or move close to your new employer. Homeowners, on the other hand, have to deal with inflexible mortgage agreements and are confronted with lengthy and costly sales processes. Even those who hire an expensive estate agent can be disappointed with the proceeds of the sale. Property gains tax is also due.

5. Inefficient management

Homeowners know this: Good and, above all, quickly available craftsmen are rare and relatively expensive. Renovations of large properties, on the other hand, are much more efficient, as several apartments can be renovated at the same time or the relevant components can be replaced. Tenants can delegate maintenance to the owners. Both then benefit directly or indirectly from economies of scale. Homeowners, on the other hand, have to take care of this themselves and do not benefit from volume discounts.

Managing residential property yourself is simply anachronistic in today's specialized service society.

6. Opportunity costs

Those who do not tie up their capital in real estate can take advantage of the benefits of movable assets. A broadly diversified portfolio of securities provides excellent risk diversification. If you overweight equities or corresponding index funds, you can expect a respectable return in the long term. The annual total return on Swiss equities, for example, is 7.7 percent. Bank Pictet has calculated this figure for the very long and therefore representative period from 1926 to the end of 2024. Even after deducting inflation, equities still offer a real return of 5.6 percent – more than with Swiss real estate.

And beware! Real estate promoters often advertise with the supposedly attractive return on equity. In this case, it does not offer a fair comparison. This is because returns on the stock market can also be leveraged with the use of relatively cheap borrowed capital. In the vast majority of cases, however, this is not advisable. Because leverage means risk. Share prices can fall. If the debt to be repaid remains the same, the equity capital invested will shrink disproportionately to the loss in value of the investments. Exactly the same applies to a mortgaged house.

7. Peripheral regions at risk

«Location, location, location» is the guiding maxim of the real estate world. The differences are huge. Anyone who owns a well-maintained house in a quiet and well-developed district in the city of Zurich will hardly complain about the lack of appreciation gains – at most about the increased tax burden that results. The joy of owners is the sorrow of potential buyers. For many, such properties are simply unaffordable.

And in less vibrant regions with higher vacancy rates real estate is a value destroyer. Switzerland has many remote regions, such as the Jura, the Bernese Highland, the Upper Valais, the Napf region, parts of Ticino and Grisons. They are suffering from high levels of emigration and a shrinking population. If there is no work, young people leave the villages. Pensioners are left behind, often with little means to maintain their homes. If they also leave the village because they move into a retirement home or die, they often leave behind worthless ruins. Witnesses to an outdated concept of investment.