28.12.2025The Economics of Real Estate with Prof. Hilber

For a long time, real estate was considered to be more of a practical domain than an academic subject. Two factors changed this. Firstly, the 2008 global financial crisis highlighted real estate as a key asset class. Secondly, we are seeing early stages of a global housing affordability crisis. Thirty years ago, only a few cities, like London or New York, were affected. Today, people across the globe – including an increasing number in Switzerland – are struggling to afford housing. Policymakers want to tackle and solve these issues and are looking to universities to provide evidence-based research.

First and foremost is the emerging housing affordability crisis. We are seeing an increase in housing demand through income and population growth, colliding with an increasingly unresponsive supply. Secondly, housing is not simply a “consumption good” providing a roof over one person’s head. Rather, it is increasingly viewed as an “investment good”; wealthy individuals are buying second homes as investments, investors are purchasing shares in Real Estate Investment Trusts, and individual mortgages are pooled and converted into tradeable financial securities with different risk profiles, which are sold to investors.

It’s complex and there are no easy solutions. For a start, we need to clarify some major misconceptions surrounding the real estate market.

Neither strict rent control nor government-provided housing offers a sustainable solution. Strict rent control removes incentives for landlords to maintain or even offer rental properties. This leads to a deterioration in housing quality and a reduction in rental supply. Demand in the rental market then exceeds supply, reducing market liquidity and generating long waiting lists. Government-provided housing, meanwhile, benefits only a limited number of tenants. In both cases, the “lucky” chosen renters benefit, but this creates an insideroutsider problem, with young people, those forced to move frequently and vulnerable groups in society often being left on the outside.

Another misconception is that building more housing is ineffective. It’s basic economics: if supply is unresponsive – or, as economists say, inelastic – rising demand simply drives up rents and prices. And if rents are strictly controlled, it reinforces the insider-outsider problem. The key is to make supply more responsive – or elastic – to price increases.

The third major misconception is that “greedy” developers, investors, landlords or short-term rental platforms are single-handedly to blame for the affordability crisis. While they often benefit financially from rising prices and rents – and there are indeed some bad actors – they are a symptom rather than the cause of the mounting affordability crisis.

Experts estimate that, based on current demand growth, Switzerland must build around 50,000 homes a year – or slightly more – on a sustained basis to prevent the affordability crisis from deepening. However, there has been a slow downward trend since around 2018/19, which is unlikely to be cyclical in nature.

It is crucial that we learn from the experience of the UK. The peak in housebuilding there occurred in the late 1960s, with well over 400,000 new homes completed annually. Today, the figure is only around 200,000, despite rising real incomes and population growth. Over several decades, this shortfall has made a huge difference and led to a very severe housing affordability crisis, resulting in the highest level of homelessness in the developed world.

Regulations and incentives. Switzerland has a rules-based zoning system. If land is zoned as residential and you meet the requirements, you can build. There are also strong fiscal incentives for municipalities to zone land at the fringe for residential purposes to attract “good” taxpayers. While building homes comes at a cost to municipalities, for infrastructure, schools etc., Swiss municipalities also receive direct income tax revenue from their new residents. Until 2013, this combination of lax regulation, fiscal incentives and municipal autonomy was a “recipe” for comparably affordable housing, albeit at the cost of urban sprawl at the fringe. What changed in 2013 with the reform of the Federal Spatial Planning Act was that municipalities lost their authority to rezone land for residential purposes as they please. In some cases, they are even required to rezone existing residential land back to non-building use. As a result, sustaining the construction of 50,000 or more housing units per year may become increasingly difficult, potentially leading to an affordability crisis.

Taken in isolation, that is indeed a good thing. However, it comes with substantial opportunity costs, and there are more effective ways to enhance biodiversity and improve recreational access than implementing a green belt around cities. If we want to increase housing supply, we can either build outwards or upwards and more densely. Cities surrounded by green belts can’t grow outward, while building upwards or more densely in existing centers is much more difficult and costly. There are height restrictions, historical buildings are often protected and, even where redevelopment is permitted, it typically involves contamination issues, time delays, and strong resistance from neighbors. At the urban fringe, building is cheaper and faces less opposition.

High salaries generate strong demand for high quality housing. However, the supply of such housing in urban areas is limited, leading to elevated prices. Compared to other countries, buying a home in Switzerland is very expensive, and mortgage lending is tightly regulated. To start with, buyers must provide a cash down payment of at least 20 percent of the purchase price. That is a lot of money. Moreover, lenders’ affordability criteria require that household income sufficiently covers all housing costs in a stress-test scenario.

Yet, perhaps the most important factors are historical and structural. Switzerland is highly urbanized, with most of the population living in low-rise apartment buildings. Until the mid-1960s, condominiums were not permitted. Historically, apartment buildings were therefore entirely renter-occupied – a pattern that has largely persisted to this day due to strong path dependence. In addition, private landlords and institutional investors can operate apartment buildings more efficiently than fragmented groups of condominium owners.

• Housing affordability is one of the biggest political time-bombs of our time.
• The housing affordability crisis accelerates societal polarization with the potential for political unrest.
• We need an evidence-based understanding of the interplay between land use regulation, taxation and housing market outcomes to create an environment in which we can keep housing affordable.

Christian Hilber holds a part-time professorship ad personam in real estate finance and economics at the Department of Finance UZH and a professorship of economic geography at the London School of Economics and Political Science (LSE). He is also the Vice-President (with responsibility for research) of the Executive Committee of the UZH’s Center for Urban and Real Estate Management (CUREM), a leading provider for executive education, bridging academic insights and professional practice in real estate. He has been a lecturer at the Center for nearly 20 years.

Text: Victoria Watts, Photo: Hugh Mitchell, Source: Oec. Mag. #24

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