Switzerland: How buying real-estate can kill you financially and reasons to go for stocks instead
tl;dr Houses are bad investments due to foreign millionaires inflating real-estate for the rest of us. Stocks are better: In Switzerland, there is no tax on capital gain and an interesting estate tax treaty with the US, so one can profit from low-fee ETFs.
A bit about myself: I run a technical recruitment agency and a job-board (jobs.coderfit.com), based in Zurich and I will help you skip boring calls with non-technical recruiters, assess you reasonably and match you with cool tech! Please reach out to me at firstname.lastname@example.org.
Almost four years passed since I wrote “8 reasons why I moved to Switzerland to work in tech” and I want to update on some things that are on my mind right now. In 2014, I moved to Zurich with 1000 EUR in my pocket to start my first job after college. I worked for three years as a software engineer, quit that job to run my own tech recruiting agency since mid 2017 full-time.
This post is supposed to give an update on how life in Switzerland developed for me in the last four years and what I can recommend anyone to do who moves here or lives here for some time.
If one is willing to work in a normal job and have a modest lifestyle, one can become half a millionaire within a short time. Check out this five min video where I talk about how reducing spending has a bigger impact on your financials than making more money:
After living frugally for some time the question arises how to keep and grow wealth. The two main investments most people can do are real estate and stocks. It turns out Switzerland clearly deters people from buying real estate and incentivises to put money on the stock market. In the remainder of this article, I will first explain how the Swiss system punishes you if you own a house and then talk about how it rewards you for owning stocks:
Prices for real-estate are highly inflated
While in the US there are regions where people make $50k a year and a house costs $50k — $100k (like in Milwaukee, Dallas, Pittsburgh, Kansas City, San Antonio, Houston, see property investment rankings) in Europe and especially in Switzerland it is not like that. An old 3-bedroom apartments located on the edge of Zurich-city can cost 500k CHF — and that would be considered cheap. However, such an apartment can be rented for 1600 CHF, so the price-to-rent (P/R ratio) is 25 (500k / (1600*12)). A financially rational person would consider buying only if the P/R ratio is 15 or lower.
The reasons for this high price-to-rent numbers are manyfold. One reason is that pension-funds are pouring money into real-estate due to low (well, negative) interest rates, another reason is that foreign multimillionaires buy real estate in Switzerland to benefit from Swiss stability. They do this although the return on investment is zero or negative.
A Swiss real-estate consultant told me that the last thing he would invest in is Swiss real-estate because the market is one of the most irrational ones he has ever seen. One story he told was this: A rich Russian couple bought an overpriced house because the wife liked the fact that the kitchen was painted in green, her favourite color. The neglected the fact that basically any kitchen can be painted in any color in no time and overpaid quite a bit. Such irrational buying behaviour inflate prices for the rest of us. Also, it is easy for wealthy people to move here. I called the German and Swiss migration offices to compare how hard it is for wealthy people to move:
If you have 100k EUR in savings, the Swiss authorities will consider on a case-by-case basis if you can immigrate and how long you can stay here. If you have several millions you will get a permanent residency. This isn’t true for most other countries. That is why wealthy people move here (and buy real-estate).
Switzerland is renter-friendly
Compared to most countries, Switzerland is renter-friendly. Renter protection is alien to immigrants from Eastern Europe; they are used to the possibility to be kicked out with short notice or someone visiting with a baseball bat if rent is not paid on time. Not so in Switzerland. Even if rent is not paid on time, one can not be just kicked out. Some of friends are landlords and they suffered heavily from renters who just didn’t pay rent for months and disappeared.
Many who come to Zurich complain about its high rents. Adjusted for income and house-prices, rents are actually very low due to rent-control. They stay more or less stable. Rent sometimes even go down, if the nation-wide “reference interest” decreases. This happened 1. June 2017 for the last time — I pay 50 CHF for my rent since then. (I advise everyone in Zurich to become member of mieterverband.ch. For 100 CHF a year you get important news on tenancy regulations, free legal advise on lease agreements and legal costs insurance.)
How buying real-estate on the countryside can kill you financially
Not only rich Russians but also average people are irrational. Especially when they want to buy a house on the countryside aiming for building up wealth for their children arguing that “land always goes up in value”. A simple calculation shows how buying a house on the countryside is usually a bad investment:
Let’s say you buy land worth 100k CHF with a new house on top of it worth 400k CHF. After 30 years, the land doubled in value and is worth 200k CHF but the house now has an old kitchen and, let’s say, the roof has to be renovated. So, the value of the 30-year old house is only around 200k CHF. Within 30 years you managed to turn 500k CHF into 400k CHF. Everyone who invests in stocks during these 30 years will laugh at this:
The average return on stocks in every 30 year period since 1928 is 10%. In such along period, due to compound interest, 500k CHF would have turned into 8.7 million CHF — check and calculate it for yourself, if you don’t believe me.
Investing in stocks means you give your money to companies that sell goods or services and deliver value. The only way the value of real-estate can go up is due to shortage and this happens only in specific neighbourhoods in cities when dodgy areas transform into good ones.
Value-increase of real-estate never happens on the country-side, yet most people want to by a “house with land” to save for retirement. There are good other reasons, why people may want to buy real-estate, but living in it to “save up for your children/retirement” is in most cases wishful thinking.
Swiss law-makers know that — on average — people are bad with money and biased towards buying a house. So, they introduced a law that actually punishes you if you own a house — there is a thing here called “Eigenmietwert”: You pay taxes on the hypothetical rent you could make renting out your own property. This is an attempt to level the playing field between renters and landlords. The reasoning goes as follow: Most assets generate income. Bonds pay interest, stocks pay dividends. A house is also an asset, and also generates financial benefit. The lawmakers argue that it shouldn’t matter if a renter pays rent or the owner lives in it. So if you buy a 500k CHF home that can be rented out for 1600 CHF a month, a whopping 19’200 CHF (12*1600 CHF) “virtual rent” is added to your taxed income.
Use the chance to invest in US-based low-fee ETFs
Switzerland’s capital-gain tax is zero as long as you don’t count as a “professional investor” (there are 5 criteria that the tax authority look at to check for this). Hence, in Switzerland, if you invest in stocks “as a hobby”, you get the opportunity to preserve and increase wealth nicely. In most other countries, profit from stocks is added to your income and can be a huge burden because you pay taxes if the market goes up but no one reimburses you if the market goes down.
I have researched on stocks and ETFs in which I want to invest in long-term (=not having to check my portfolio more than once a month). I am not a trader but spend most of my time building coderfit.com after all.
People say that no mutual fund can outperform the market over the longterm. Also, I don’t want to give away 1–2% of as management fee for actively managed funds, because in this case the only one guaranteed to get rich are the ones managing the money. Remember, the first rule of Wall Street: “Nobody knows if the stock is gonna go up, down, sideways or in fucking circles”.
Stocks themselves are too volatile for me at this point and I might invest in some companies in the future, but not now. (Update May 2018: I successfully invested in NASDAQ:FB when it dipped March 2018) So, mainly invest via passively managed funds that follow stock-indices and spread over thousands of stocks and take only 0.05%-0.11% in management fees.
I invest a large chunk of my net-worth in two ETFs: 50% in SCHB and 50% in VEU. They are the cheapest available instruments that capture the total, worldwide stock market. I use Interactive Brokers; they have a CH-IBAN you can use to transfer Swiss Francs for free.
Even if you can only invest 5000 CHF, you should start learning and doing it ASAP (compound effect anyone?). Interactive Brokers is a “discount broker” which means its fees are low. Also, they are international which means one can take stocks and investment along when one moves to a different country— try doing this with a house. That said, I am not associated either with Interactive Brokers, Schwab nor Vanguard. Also, this is no investment advice; we are 10 years past the last recession and the stock market might make a downwards-correction anytime. In a recession your money might be locked for 3–10 years , so be aware. (If you ask me, that is still better than locking money in real-estate for >30 years.)
Be aware of US estate tax liability
Be careful! If not in Switzerland, investing in US-based financial instruments that I mentioned before has a catch. It turns out ETFs are “situs assets” which carries an “estate tax liability”. The default exemption limit from US estate tax for non-US residents/taxpayers is a mere $60k. This is why my friends from Germany can’t easily invest in these funds unless they do some hacks, like setting up a company to do the trading (since companies “never die”). Without doing these hacks the investor’s family might have trouble pulling the money out of the US if the investor dies.
Fortunately, Switzerland and the US have concluded an estate tax treaty which raises the limit to $5.49M. So unless you’re Switzerland-based multimillionaire , US estate taxation doesn’t apply to you. So, being able to use these cheap financial brokers and instruments can be seen as another reason why it is so awesome here and why people like to move here. If you’re working in tech, there are more reasons why you should move here, find them in my other blog post.
Summary: investment no-brainer while in Switzerland
- Don’t buy a house unless you have non-monetary reasons.
- If you’re into preserving or growing wealth, buy stocks or ETFs (but beware of a potential recession).
- Use passively managed financial instruments with low management fees like the ones issued by Schwab or Vanguard.
Regardless whether you have money to invest or not, if you are a software engineer, or if you can refer one, I run a technical recruitment agency and a jobboard (jobs.coderfit.com) based in Zurich. I will help you skip boring calls with non-technical recruiters, assess you reasonably and match you with cool tech jobs! Please reach out to me at email@example.com. If you like this article, you might love:
- Eight reasons why I moved to Switzerland to work in tech (Sept 2014)
- Five years after moving to Switzerland. Why I am still here. (April 2019)
- Why software engineers don’t get jobs: Four horror stories
- Compassion — An efficient alternative to rigid Code of Conducts
Originally published at coderfit.com on October 13, 2017.
Update December 2018: I am in the minus both with my stocks and some crypto. This feels bad. Don’t take financial advice from me. This blogpost only serves to educate about incentives of the Swiss system. I plan to reduce my net worth in stocks from 50% to 25% and put at least 10% in physically gold. Why? Currently, Nicholas Nassim Taleb claims to only have cash and some gold (author of “The Black Swan”; he specializes in the mitigation of tail risks aka HOW NOT TO DIE). I just copy what he’s doing.
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