## 1cheea2024002

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### Inflation Developments
- Headline inflation reached 3.5 percent in August 2022, above the SNB’s price stability range of 0–2 percent.
- Headline inflation fell below 2 percent by August 2023 and returned to the SNB’s price stability range.
- Domestic inflation rose earlier in 2022; imported inflation (rising energy costs) was a primary initial driver.
- SNB conditional forecast: inflation expected to be 1.1 percent by 2026.

### The Monetary Policy Response and SNB Implementation
- Policy rate path:
  - Increased from -0.75 percent in May 2022 to 1.75 percent in June 2023.
  - Cut by 25 bps to 1.5 percent in March 2024.
- FX interventions and exchange rate:
  - SNB foreign currency sales: CHF22.3 billion in 2022 and CHF133 billion in 2023; total CHF155 billion over 2022–2023.
  - Franc appreciated cumulatively by 10 percent nominally between 2022 and 2023.
  - Real appreciation was 3.5 percent in 2023.
- Balance sheet and implementation tools:
  - SNB bills issued: CHF184 billion.
  - Repo transactions: CHF128 billion.
  - Financial loss in 2022: CHF132 bn (mostly FX investment losses, CHF131 billion).
  - Financial loss in 2023: CHF3.2 billions; 2023 loss driven by higher interest payments to banks (CHF8.5 billion) partially offset by profits on foreign position (CHF4 billion).
  - Total sight deposits held at the SNB decreased by 53 percent between June 2022 and March 2024.
  - Threshold factor remunerated at the policy rate lowered from 28 to 25.
  - Minimum reserves stopped being remunerated in December 2023.
  - Minimum reserve ratio increased from 2.5 to 4 percent in April 2024 (effective July 2024).

### Reserve Tiering (summary)
- Under negative interest rates, SNB exempted a portion of banks’ deposits (exemption threshold) from negative rates.
- Old system: sight deposits up to the exemption threshold remunerated at zero; reserves exceeding threshold subject to negative interest rates.
- Objective: alleviate burden on banks, protect profitability, and encourage lending.

### Passthrough to Market, Deposit, and Lending Rates
- Passthrough has been quick and significant; SARON and other money market rates remained close to the policy rate.
- Passthrough coefficient ranges in current tightening cycle:
  - Most consumer loan rates: between 30 and 70 percent.
  - Term deposits: approximately 70 percent for maturities under 3 years; about 50 percent for longer maturities.
  - Fixed-rate mortgage rates: similar pattern to term deposits.
  - SARON-linked mortgages: 70 percent passthrough.
  - Savings deposits: around 30 percent passthrough.
- Volume and profitability:
  - Savings deposits size: 311 billion CHF.
  - Relatively low passthrough on savings deposits contributed to higher interest margin and profitability of Swiss banks in 2023.
- Comparative passthrough:
  - Current Swiss cycle: savings deposits 26 percent, 3-month term deposits 68 percent (compared with 10 percent and 86 percent respectively in the 2005–2008 tightening cycle).
  - Euro Area current cycle passthrough: on average 60 percent for new time deposits and 45 percent for new mortgages; comparable with Switzerland’s 50 percent for time deposits and 44 percent for new mortgages.
- Note: passthrough estimates use different methodologies (volume weighted vs equally weighted averages).

### Real-Sector Impact — Households, Mortgages, and Rent
- Mortgage composition shifts in new originations since 2022:
  - Owner-occupied properties: SARON share rose from about 15 percent to around 35 percent.
  - Investment-purpose residential rental properties: SARON share rose from less than 30 percent to above 70 percent.
- Mortgage loan growth:
  - Mortgages represent 85 percent of bank lending.
  - Growth of mortgage loans moderated to 2.4 percent in 2023 from 3.5 percent in 2022.
  - Growth in other loans contracted in 2023, mainly due to decline in foreign-currency loans.
- Household debt and interest burden:
  - Staff estimate: in 2023, mortgage interest expenses rose by approximately 0.5 percent of Swiss GDP.
  - BIS-based estimate: debt service ratio of the Swiss private non-financial sector increased by 1 percent of GDP between 2022Q4 and 2023Q3.
- Mortgage reference rate and rental inflation:
  - Mortgage reference rate rose in two steps in 2023 from 1.25 percent to 1.75 percent in June and December.
  - A rent increase of up to 6 percent is possible if tenancy agreement’s reference interest rate is lower than the new reference rate.
  - Rents constitute around 20 percent of the CPI basket.
  - Observed rental inflation (y/y) increased from about 1.5 percent before the reference rate rise to 2.4 percent after the rise.
- Real estate price growth and credit gaps:
  - Owner-occupied properties: positive but slower price growth in 2023.
  - Residential-investment properties: slight declines in 2023.
  - Indications of recovery in price growth in 2024Q1.
  - Measures of credit gaps have normalized and indicate a broadly neutral credit cycle.

### Exchange Rate Passthrough to Inflation
- Import share: around a quarter of the CPI basket consists of imports.
- Staff estimates (1996M1–2023M12, Jordà local projections):
  - Passthrough to headline CPI at 12-month horizon: 0.12.
  - Passthrough to imported inflation at 12-month horizon: 0.35.
- Historical and recent episodes:
  - Stulz (2007): average passthrough to consumer prices over a year of 0.17 for 1967–2004.
  - Bonadio et al. (2020): passthrough into import prices between 0.4 and 1 for the 2015 appreciation episode.
  - Oktay (2022): 1-year headline CPI passthrough around 0.12 with heterogeneity across items.
  - Recent franc appreciations and magnitudes:
    - Roughly 6 percent in 2020.
    - 4.2 percent (y/y) in 2022.
    - 6.8 (y/y) percent in 2023.
  - Based on estimated passthrough coefficients, direct contribution from appreciation to decline in headline inflation fluctuated between -0.5 and -0.8 percent (and between -1.7 and -2.8 percent for imported inflation) over the past two years.

### Financial Conditions, Output, and Inflation Effects
- Financial Conditions Index (FCI):
  - Some tightening began in 2022Q1; FCI peak in 2023Q1.
  - Since 2023Q1, gradual easing due to lower price of risk and decline in longer-term rates.
  - As of 2024Q1, financial conditions remained in tight territory.
  - Policy rate cut in March 2024 and franc depreciation expected to move financial conditions toward more neutral levels, conditional on external developments.
- Real economy responses (Bayesian VAR, 2000Q1–2019Q4):
  - A one standard deviation increase in the FCI associated with a decline in real GDP from pre-shock path by 0.35 percent within four quarters; effect peaks around four to five quarters.
  - For inflation, decline is 0.1 percent within four quarters; effect peaks within eight to ten quarters.
  - Cumulative tightening from 2022Q1 roughly three times larger than average shock in estimation sample.
  - Alternative identification schemes yield similar qualitative results; sign-restrictions peak impacts can be larger (e.g., -0.6 for GDP and -0.2 for CPI).

### Wage Developments and Labor Market Dynamics
- Wage and unemployment statistics:
  - Annual nominal wage growth: 0.9 percent in 2022 and 1.7 percent in 2023.
  - Real wage growth: -1.9 percent in 2022 and -0.4 percent in 2023.
  - Nominal wages expected to grow at 1.9 percent in 2024; real wage growth projected around 0.4.
  - Wage share of GDP close to 60 percent since 2021.
  - Unit profits declined since 2021Q4.
  - Unemployment rate for older workers (age 55–64): 3.9 percent; prime-age workers (age 25–54): 4.1 percent (data as of 2022).
- Wage-Phillips curve findings (2000Q1–2019Q4):
  - Slope (unemployment gap coefficient) negative.
  - Lagged and expected inflation and productivity growth correlate positively with wage growth.
  - Error-correction term negative: deviations of real wages from long-run productivity relationship dampen or boost subsequent wage growth toward equilibrium.
  - Historical contributions: pre-GFC inflation expectations contributed around 1 percentage points to nominal wage growth; productivity around 0.4 percentage points. Post-GFC, productivity declined but wages grew due to expected inflation and lagged wages; productivity recovered since 2017.
- Assessment of wage-price spiral risk:
  - Risk remains low because inflation expectations are low and anchored, inflation projected to stabilize, profit margins under pressure, unemployment increasing and vacancies declining.
  - Unexplained (backward-looking) component of wage formation contributed more since 2022Q1 but overall risk remains low.

### Beveridge Curve, Matching, and Policy Options on Labor Supply
- Beveridge Curve (BC) dynamics:
  - Post-pandemic: BC shifted outward and steepened; matching efficiency deterioration was main upward shifter.
  - Decomposition (Ahn and Crane, 2020 method) identifies matching efficiency, separations, and unemployment dynamics as shifters; post-pandemic matching efficiency largely drove upward shift.
  - Occupational and regional mismatch indices trended upward since aftermath of GFC and especially since 2018; further increase post-pandemic.
- Recruiting difficulties concentrated in occupations with higher skills mismatch and contact-intensive industries.
- Demographics:
  - Baseline projections imply old age dependency ratio will deteriorate from 30 to about 50 percent by 2070.
- Policies to raise labor supply and address mismatches:
  - Boost female full-time participation:
    - Move from joint to individual taxation at federal and cantonal level (Federal Council legislative reform proposal).
    - Reduce childcare costs and increase childcare supply; targeted support such as fee reductions, childcare benefits, or tax credits.
    - Childcare tax deduction increased from CHF 10,100 to 25,500 for federal direct tax purposes since January 2023; tax deduction of CHF 6,700 per child irrespective of declared childcare costs.
  - Increase participation of older workers:
    - Targeted professional advice and training for jobseekers aged 50 years or over.
    - Longer grace period to draw unemployment insurance benefits for those aged over 55 years.
    - Flexibility to combine retirement and work; incentives within the pension system; increase retirement age and align pension incentives.
    - Ongoing increase of retirement age for women to 65 years; early retirement in first pension pillar still possible starting from age 63 years.
  - Immigration and integration measures:
    - Active policies: language and citizenship training, matching skills with opportunities, tailored job platforms, private-sector outreach, targeted assistance with housing, health care, schooling.
    - Planned measures to better integrate refugees: improving qualifications reorganization, targeted services by regional employment centers, strengthened federal-cantonal cooperation.

### Real Estate Markets and Vulnerabilities
- Price and market dynamics (2023):
  - Owner-occupied properties: +3 percent for apartments; +1 percent for single family houses.
  - Residential investment properties: -2 percent.
  - Commercial real estate (CRE): -4 percent for office and industrial spaces; retail stagnation.
  - Overall segment adjustments ranged between -4 percent and 3 percent.
- Housing market tightness and supply:
  - Vacant dwellings: 1.2 percent of total dwelling stock (as of 2023).
  - Swiss population growth (2012–2022): 10 percent.
  - Models indicate overvaluation of house prices by 15 to 40 percent (with potential upward bias).
- Mortgage origination and stock:
  - New mortgage origination volume declined by 2.9 percent in 2023.
  - Sectoral origination changes in 2023:
    - Owner-occupied properties: -9.8 percent.
    - Rented out residential properties (household): -6.8 percent.
    - Residential property mortgages to company borrowers: +16.7 percent (driven mostly by increase in size of jumbo mortgages to companies; 90th percentile size experienced an 18 percent increase).
  - Annual growth rate of mortgage stock: 3.5 percent in 2022 → 2.5 percent in 2023.
- Household balance sheets and arrears:
  - Average household mortgage leverage: CHF 0.42 per CHF 1 of real estate assets in 2011 → CHF 0.36 in 2022.
  - Cash and deposits to mortgage debt: 95.4 percent in 2011 → 101.2 percent in 2022.
  - Housing expenditure share of disposable income in 2022: 24.7 percent (EU average: 19.6 percent).
  - Arrears rate related to housing: 5.0 percent in 2012 → 7.1 percent in 2022.
- Institutional real estate (IPRE):
  - Size of professionally-managed real estate market: 43 percent of GDP in 2022.
  - Market size growth since 2010: 87 percent.
  - IPRE composition (2022): Residential 48 percent; Office 31 percent; Retail 14 percent.
  - CRE companies’ ROA: above 3 percent in 2022 → around 1 percent in 2023 H1.
  - Property revaluation gains (2018–2022) averaged 1.7 percent of total book value per year; 2023 H1 revaluation loss was 0.5 percent of total book value.
  - Revaluation gains accounted for 48.1 percent of total rental income (2018–2022); revaluation losses amounted to 27.7 percent of total rental income in 2023 H1.
  - Financing: average interest rate on financial liabilities declined by 0.7 percentage point from 2018 to 2021, then increased by 0.4 percentage points since 2022.
  - Newly-issued corporate bonds average interest rate: 0.25 percentage points in 2021 → 1.90 percentage points in 2023H1.
  - Interest-coverage ratio: 13.7 (2018–2021 benchmark) → 9.4 in 2023 H1.
  - Forward-looking probability of default (CRI) remains low for publicly-traded Swiss IPRE firms despite increases in 2023.
- Financial sector exposures:
  - Mortgage-to-GDP ratio (2022): 148 percent.
  - Mortgage composition of mortgage stock:
    - Owner-occupied residential: 62.3 percent.
    - Investment-purpose residential: 23.0 percent.
    - CRE: 14.7 percent.
  - Banks hold more than 9 percent of corporate bonds issued by the largest four IPRE firms.
  - Data limitations: exposures via credit lines and corporate bonds difficult to fully assess; SNB and FINMA plan supervisory loan-by-loan dataset with >90 percent coverage (smallest banks exempted).
- Insurance and pension funds:
  - Insurance companies (2022): real estate properties 9 percent of total assets; mortgages 7 percent of total assets; total real estate exposure 16 percent of total assets (EU insurers average: 7.5 percent).
  - Life insurance: 14 percent of portfolio in real estate properties; mortgages constitute 11 percent of total assets.
  - Pension funds (2022): direct allocation to real estate 22.8 percent of total assets; mortgages allocation 3.0 percent of total assets.
  - Breakdown of pension fund direct real estate allocations:
    - Domestic direct real estate holdings: 8.4 percent.
    - Unlisted collective investments: 7.0 percent.
    - Listed real estate funds: 3.5 percent.
    - Real estate abroad: 3.9 percent.
  - Cross-border direct real estate holdings limited; foreign real estate exposure 2 percent of real estate portfolio.
- Vulnerabilities and mitigants:
  - Household risks from high mortgage debt mitigated by high net wealth and liquid financial assets.
  - Rising interest expenses and property devaluations pressuring IPRE profitability and cashflows.
  - Banks have high exposures to real estate overall; CRE exposures are a smaller share.
  - Pension funds and insurance companies have meaningful direct real estate exposures (pension funds direct real estate allocation 22.8 percent and additional 3.0 percent in mortgages in 2022).
  - Data limitations constrain full cross-sector and cross-border exposure assessment.

*Source: IMF staff analysis (excerpt from 1cheea2024002).*

### 1. Infl   ation Developments ______________________________________________________________ 5

### 1. Inflation Developments

### Background
- Following the pandemic, Switzerland experienced a sharp increase in inflation driven by a surge in consumer demand, supply chain disruptions, and higher energy costs related to Russia’s invasion of Ukraine.
- Headline inflation reached a high of 3.5 percent in August 2022, exceeding the SNB’s price stability range of 0–2 percent.
- Domestic inflation began to rise earlier in 2022; imported inflation (rising energy costs) was a primary driver of the initial surge.
- After peaking in August 2022, headline inflation briefly rose at the start of 2023 but fell below 2 percent by August 2023, returning to the SNB’s price stability range.

### The Monetary Policy Response
- The SNB adopted a flexible strategy: raising the policy rate and allowing the exchange rate to appreciate to fulfill its price stability mandate.
- Policy rate moves:
  - Policy rate increased from -0.75 percent in May 2022 to 1.75 percent in June 2023.
  - The SNB cut the policy rate by 25 bps to 1.5 percent in March 2024.
- Foreign exchange interventions and FX sales:
  - From 2022Q4, the SNB sold foreign currency totaling CHF22.3 billion in 2022 and CHF133 billion in 2023.
  - Total FX sales over 2022–2023 amounted to CHF155 billion.
- Exchange rate movements:
  - The franc appreciated cumulatively by 10 percent nominally between 2022 and 2023.
  - Real appreciation was 3.5 percent in 2023.
- Inflation outlook in SNB’s conditional forecast: expected to remain within the price stability range, at 1.1 percent by 2026.

### SNB Balance Sheet and Implementation Tools
- Balance sheet contraction in 2022 and 2023 driven largely by FX sales (CHF155 billion total during 2022–2023).
- Liability and asset shifts (selected figures):
  - CHF184 billion of SNB bills issued.
  - CHF128 billion of repo transactions.
- Financial results:
  - Financial loss in 2022: CHF132 bn (mostly FX investment losses, CHF131 billion).
  - Financial loss in 2023: CHF3.2 billions; 2023 loss driven by higher interest payments to banks (CHF8.5 billion) partially offset by profits on foreign position (CHF4 billion).
- Liquidity and reserve management:
  - Total sight deposits held by banks and other institutions at the SNB decreased by 53 percent between June 2022 and March 2024.
  - The SNB lowered the threshold factor remunerated at the policy rate from 28 to 25.
  - To reduce tiering costs, the SNB stopped remunerating minimum reserves in December 2023.
  - The minimum reserve ratio was increased from 2.5 to 4 percent in April 2024 (effective July 2024).

### Reserve Tiering (Box summary)
- During negative interest rates, the SNB implemented reserve tiering to exempt a portion of banks’ deposits (exemption threshold) from negative rates.
- Under the old system, sight deposits up to the exemption threshold were remunerated at zero; reserves exceeding the threshold were subject to negative interest rates.
- Objective: alleviate burden on banks, prevent excessive pressure on profitability, and encourage lending.

### Passthrough to Interest Rates
- Passthrough from the SNB policy rate to money market, deposit, and lending rates has been both quick and significant.
- SARON and other money market rates remained close to the policy rate during the transition to positive rates.
- Passthrough coefficient ranges in the current tightening cycle (how market rates react to policy rate changes):
  - Most consumer loan rates: between 30 and 70 percent.
  - Term deposits: approximately 70 percent for maturities under 3 years; about 50 percent for longer maturities.
  - Fixed-rate mortgage rates: similar pattern to term deposits.
  - SARON-linked mortgages: 70 percent passthrough.
  - Savings deposits: around 30 percent passthrough.
- Volume and bank profitability implications:
  - Savings deposits size: 311 billion CHF.
  - Relatively low passthrough on savings deposits contributed to higher interest margin and profitability of Swiss banks in 2023.
- Comparative passthrough:
  - In the current Swiss cycle, passthrough coefficients: savings deposits 26 percent, 3-month term deposits 68 percent (compared with 10 percent and 86 percent respectively in the 2005–2008 tightening cycle).
  - Euro Area current cycle passthrough: on average 60 percent for new time deposits and 45 percent for new mortgages; comparable with Switzerland’s 50 percent for time deposits and 44 percent for new mortgages.
  - Passthrough estimates use different methodologies due to data availability (volume weighted vs equally weighted averages).
  - Comparable passthrough ratios align with comparable banking concentration ratios (measured by 5-bank asset concentration).

### Real-Sector Impact: Households and Mortgages
- Shift in mortgage composition and exposure:
  - Share of SARON (adjustable-rate) mortgages in new originations increased substantially since 2022:
    - Owner-occupied properties: from about 15 percent to around 35 percent.
    - Investment-purpose residential rental properties: from less than 30 percent to above 70 percent.
- Household debt and interest burden:
  - Swiss households have a high debt level (mostly mortgages) relative to other advanced economies.
  - Staff estimates: in 2023, mortgage interest expenses rose by approximately 0.5 percent of Swiss GDP.
  - BIS-based estimate: the debt service ratio of the Swiss private non-financial sector increased by 1 percent of GDP between 2022Q4 and 2023Q3.

*International Monetary Fund — Switzerland: Selected Issue Paper (May 22, 2024)*

### 9. Higher interest rates also lead to higher rental cost for non-homeowners. Policy rate

### 9. Higher interest rates also lead to higher rental cost for non-homeowners. Policy rate

### Mortgage reference rate and rental inflation
- Policy rate adjustments affect average mortgage interest rates and thus the mortgage reference interest rate used for rent adjustments under Swiss regulation.
- In 2023, the mortgage reference rate rose in two steps from 1.25 percent to 1.75 percent in June and December.
- A rent increase of up to 6 percent is possible if the reference interest rate specified in the tenancy agreement is lower than the new reference interest rate.
- Rents constitute around 20 percent of the CPI basket, creating a feedback effect between the SNB policy rate and the CPI (an increase in the mortgage reference interest rate has a temporary effect on inflation).
- The actual passthrough to rental cost from the first reference rate increase was smaller than anticipated: rental inflation (y/y) increased from about 1.5 percent before the rise in mortgage reference rate to 2.4 percent after the rise.

### Credit, house prices, and monetary tightening
- Growth of mortgage loans, which represent 85 percent of bank lending, moderated to 2.4 percent in 2023 from 3.5 percent in 2022.
- Growth in other loans contracted in 2023, mainly due to a decline in loans granted in foreign currency.
- Measures of credit gaps (deviation of the credit-to-GDP from its trend) have normalized and currently indicate a broadly neutral credit cycle.
- Price growth of residential real estate moderated with sectoral variation:
  - Owner-occupied properties experienced positive but slower price growth in 2023.
  - Residential-investment properties (apartment buildings) saw slight declines in 2023.
  - Indications of a recovery in price growth were observed in 2024Q1.

### Exchange rate passthrough to inflation
- In Switzerland, around a quarter of the CPI basket consists of imports, so exchange rate movements materially affect inflation.
- Empirical estimates and literature findings:
  - Stulz (2007) finds an average passthrough to consumer prices over a year of 0.17 for 1967–2004.
  - Bonadio et al. (2020) find passthrough into import prices between 0.4 and 1 for the 2015 appreciation episode.
  - Oktay (2022) finds a 1-year headline CPI passthrough around 0.12 with heterogeneity across CPI items.
- Staff estimates (Appendix I) over 1996M1–2023M12:
  - Passthrough rate is 0.12 for headline inflation at a 12-month horizon.
  - Passthrough rate is 0.35 for imported inflation at a 12-month horizon.
- Recent franc appreciation episodes and estimated direct contributions to inflation:
  - Franc appreciation of roughly 6 percent in 2020.
  - Appreciation of 4.2 percent (y/y) in 2022.
  - Appreciation of 6.8 (y/y) percent in 2023.
  - Based on estimated passthrough coefficients, the direct contribution from appreciation to a decline in headline inflation fluctuated between -0.5 and -0.8 percent (and between -1.7 and -2.8 percent for imported inflation) over the past two years.

### Impact on financial conditions, output, and inflation
- Higher policy rates and franc appreciation contributed to significant tightening of financial conditions.
- Financial Conditions Index (FCI) findings:
  - Some tightening began in 2022Q1 driven by price of risk from global indicators; peak in FCI occurred in 2023Q1.
  - Since 2023Q1, gradual easing in overall financial conditions occurred due to lower price of risk and lower credit costs driven by a decline in longer-term rates.
  - As of 2024Q1, financial conditions remained in tight territory with policy stance and external conditions as contributing factors.
  - The policy rate cut in March 2024 and franc depreciation are expected to move financial conditions toward more neutral levels, conditional on external developments including the exchange rate.
- Real economy responses to tightening financial conditions (Bayesian VAR, 2000Q1–2019Q4, contractionary FCI shock identified recursively):
  - A one standard deviation increase in the FCI is associated with a decline in real GDP from its pre-shock path by 0.35 percent within four quarters; the effect peaks at around four to five quarters.
  - For inflation, the decline is 0.1 percent within four quarters; the effect peaks within eight to ten quarters.
  - Results indicate persistent negative effects of financial conditions tightening on the level of output and inflation relative to trend.
- Additional notes on estimation and robustness:
  - The estimated average effects do not account for factors specific to the current cycle (pace and size of tightening).
  - The cumulative tightening from 2022Q1 is roughly three times larger than the average size of the shock over the estimation sample.
  - Alternative identification schemes yield similar qualitative results; with sign restrictions the peak impacts can be larger (e.g., -0.6 for GDP and -0.2 for CPI).

### Appendix I — methodological note on exchange rate passthrough estimation
- Method: Jordà (2005) local projections following Carriere-Swallow et al. (2023).
- Specification estimates impulse responses of prices to lag changes in the log effective nominal exchange rate, controlling for SNB business cycle index, lagged inflation, lagged changes in the exchange rate, and lagged changes in the supply price index.
- Estimated cumulative passthrough to a 1 percent appreciation at one year horizon:
  - 0.12 for the overall CPI.
  - About 0.35 for the “foreign/imported” CPI.

*Source: IMF staff analysis (excerpt from 1cheea2024002).*

### 1.      Nominal wage increases in Switzerland have remained subdued,  despite the increase in

### 1.      Nominal wage increases in Switzerland have remained subdued,  despite the increase in

### Wage developments and key statistics
- Annual wage growth was 0.9 percent in 2022 and 1.7   percent in 2023.
- Real wage growth was negative in 2022 (- 1.9 percent) and in 2023 (-0.4   percent).
- In 2024, nominal wages are expected to grow at 1.9 percent, which is higher than the historical average (1 percent), while real wage growth is  projected to be around 0.4.
- The wage share of GDP in Switzerland has increased since 2021 and is close to 60 percent.
- Unit profits have declined since 2021Q4.
- The unemployment rate for older workers (age 55–64) is  3.9 percent, slightly lower than 4.1 percent of prime-age workers (age 25–54). (Data as of 2022.)

### Wage Phillips curve framework and drivers
- A hybrid wage-Phillips curve was estimated for Switzerland, augmented with an error correction term; the model is estimated for 2000Q1–2019Q4.
- Wage inflation is measured by compensation per employee.
- Explanatory variables in the model:
  - Hodrick-Prescott filtered unemployment gap
  - Inflation expectation (proxied by Consensus 2 year-ahead forecasts)
  - Import prices
  - Deviation of real wage gaps from trend productivity
  - Lagged wage growth (to capture persistence unrelated to wage gaps)
- Estimated relationships:
  - The slope of the Phillips curve (coefficient of the unemployment gap) is negative.
  - Inflation—both lagged and expected—and productivity growth correlate positively with wage growth.
  - The coefficient of the error-correction term is negative: if real wages are above their estimated long-run relationship with productivity, they put downward pressures on wages; if below, they put upward pressures.
- Historical contributions to nominal wage growth:
  - In the run up to the Global Financial Crisis (GFC), on average, inflation expectations contributed around 1 percentage points to nominal wage growth in Switzerland while productivity growth contributed around 0.4 percentage points.
  - Post-GFC, productivity growth declined but wages continued to grow due to expected inflation and past wages (“other”), leading to some misalignment of wages from long-run relationship with productivity.
  - Productivity growth recovered since 2017 and became the dominant driver in the run-up to the Covid-19 pandemic.
  - In the post-pandemic period, lagged inflation and inflation expectations have explained the dynamics of nominal wage growth.

### Assessment of wage-price spiral risk
- The risk of a wage-price spiral remains low due to:
  - Inflation expectations are low and anchored.
  - Inflation is projected to stabilize, so purchasing power is expected to recover, limiting wage pressures.
  - Contribution from profit margins to domestic inflation has decreased; firms’ margins remain under pressure from the strong franc and lackluster growth in trading partners, limiting firms’ buffers for large wage increases.
  - Labor markets have started to adjust: unemployment is gradually increasing and vacancies are declining, which would further limit the risk of rising wage pressures.
- While the unexplained component of wage formation has had a larger contribution since 2022Q1 (a more backward-looking element), these factors together keep the wage-price spiral risk low.

### Beveridge Curve dynamics and labor-market matching
- Switzerland experienced significant labor-market tightening in the post-pandemic period: unemployment declined while vacancies increased; recently vacancies declined and unemployment increased but remain below and above the pre-pandemic level, respectively.
- The Beveridge Curve (BC) shifted outward after the pandemic and steepened somewhat:
  - Movement along the BC is cyclical; shifts are associated with structural changes (an outward shift suggests less efficient matching).
- Decomposition of BC shifts (Ahn and Crane, 2020 method) identifies three shifters:
  - Dynamics (changes in unemployment) — higher unemployment leads to fewer vacancies (downward shift).
  - Separations (probability of job separations) — higher separations require higher vacancies in equilibrium (upward shift).
  - Matching Efficiency — lower matching efficiency requires higher vacancies (upward shift).
- For Switzerland:
  - Pre-pandemic: movements in unemployment and separations contributed to downward shifts; matching efficiency contributed upward, with overall BC shifting downwards.
  - Post-pandemic: movement in matching efficiency contributed, on average and almost entirely, to an upward shift in the BC; recent rise in unemployment has partially offset this by shifting the empirical BC downward.
- Evidence of increased labor-market mismatches:
  - Indices of occupational and regional mismatch co-move; a higher fraction of job losses is due to occupational mismatches.
  - Both mismatch measures have trended upwards since the aftermath of the GFC and especially since 2018.
  - There was a further increase after the pandemic, particularly for occupational mismatches.
- Recruiting difficulties:
  - Greater difficulty recruiting in occupations with higher skills mismatch.
  - Recruitment difficulties have crept up over the past decade across industries and worsened post-pandemic, notably in contact-intensive industries (hotel and accommodations, health care).
  - Demographic trends will likely worsen recruitment difficulties: baseline population projections by the Swiss Federal Statistics Office imply the old age dependency ratio will deteriorate from 30 to about 50 percent by 2070; a rapid increase in retirees is projected over the next decade while the share of young employees will not be sufficient to replace them.

### Labor force participation and options to address skill shortages and mismatches
- Women in the labor force:
  - Labor force participation rate of working-age women increased from 75 percent in 2010 to around 80 percent in 2022.
  - The employment rate of working-age women stands at around 80 percent and is the third highest among European countries.
  - Around 60 percent of employed women are in part-time jobs.
  - High part-time work contributes to a high gender pay gap in full-time equivalent employment and negatively affects careers and pensions.
- Policy options to boost female full-time participation:
  - Move from joint to individual taxation at federal and cantonal level (Federal Council legislative reform proposal following a Parliament request) to increase employment incentives for second earners.
  - Reduce childcare costs and increase childcare supply; provide targeted support such as fee reductions, childcare benefits, or tax credits.
- Childcare costs and reform:
  - OECD Family Database: 20 percent of children aged 0–2 years from lower-income households attend childcare compared to 60 percent from higher-income households.
  - Since January 2023, the childcare costs deduction has been increased from CHF 10,100 to now 25,500 for federal direct tax purposes, with a tax deduction of CHF 6,700 per child irrespective of declared childcare costs.
  - More than 40 percent of Swiss families do not pay federal income taxes, so this reform is likely to have a relatively limited impact for low-income households.
- Older workers:
  - The average age of economically-active individuals increased by around 2 years between 2010 and 2023.
  - Economic activity rates decline markedly after age 64: from 70–80 percent among 55–64 year-olds to 10–20 percent at 65+.
  - Once unemployed, older workers face more difficulty reintegrating into the job market.
- Policy options to increase participation of older workers:
  - Targeted professional advice and training for jobseekers aged 50 years or over.
  - Longer grace period to draw unemployment insurance benefits for those aged over 55 years.
  - Flexibility to combine retirement and work; incentives within the pension system; increase retirement age and align pension incentives (e.g., reduce progressivity in second-pillar contribution rates).
  - The ongoing increase of the retirement age for women to 65 years is highlighted; early retirement in the first pension pillar is still possible starting from age 63 years.
- Immigration and integration:
  - Immigration has contributed to labor force growth; Switzerland remained among one of the most attractive OECD countries for skilled migrants in 2023.
  - The share of employed persons with foreign nationality has been increasing; full-time equivalent gap between foreign workers and Swiss nationals has been narrowing.
  - Unemployment rate of workers with a migration background has been persistently higher; immigrants work disproportionately in non-management jobs and earn on average less than Swiss nationals.
  - Active policies to attract, retain, and integrate migrants could help address labor shortages and skills mismatches; potential measures include language and citizenship training, matching migrants’ skills with job opportunities, tailored job platforms, private sector outreach, and targeted assistance with housing, access to health care and schooling.
  - Authorities have planned measures to better integrate refugees into the labor market, including improving qualifications reorganization, more targeted services by regional employment centers, and strengthened federal-cantonal cooperation on integration programs.

### Appendix: Beveridge Curve decomposition (method summary)
- Matching function estimated using:
  - Ht = σt Ut^{1-α} Vt^{α}  (equation (0.2) in source)
  - Ht = flow of new hires; Ut and Vt are unemployment and vacancy rates (normalized by labor force); α is elasticity; σt is time-varying matching efficiency.
- Job-finding probability:
  - ft = σt (Vt / Ut)^{α}  (equation (0.3) in source)
- Linearized decomposition of BC intercept identifies three components (shifters):
  - Matching efficiency: lower matching efficiency raises vacancies required and shifts BC up.
  - Job-separation probability: higher separations raise vacancies required and shifts BC up.
  - Out-of-steady unemployment dynamics: rising unemployment shifts BC down as fewer vacancies are needed due to low job finding rate.

*Source: IMF staff calculations.*

### References

### References

### Key References
- Ahn, H. J., & Crane, L. D. (2020). Dynamic Beveridge Curve Accounting. FEDS Working Paper No. 2020-027. Federal Reserve Board.
- International Monetary Fund. European Dept. (2022). Regional Economic Outlook, Europe, November 2023. USA: International Monetary Fund.
- International Monetary Fund. European Dept. (2023). Regional Economic Outlook, Europe, November 2023. USA: International Monetary Fund.
- Jackman, R., & Roper, S. (1987). Structural unemployment. Oxford Bulletin of Economics and Statistics, 49(1), 9-36.
- OECD. Economic Dept. (2024). OECD Economic Surveys: Switzerland 2024. OECD Publishing, Paris.
- Şahin, A., Song, J., Topa, G., & Violante, G. L. (2014). Mismatch unemployment. American Economic Review, 104(11), 3529-3564.

### Summary: Real Estate Markets and Vulnerabilities — The Case of Switzerland
- Prepared by Zhao Zheng; acknowledgements to S. Pelin Berkmen, Salvatore Dell’Erba, Mark Horton, and seminar participants at the FINMA and the SNB.
- Scope: examines recent developments and potential vulnerabilities of Switzerland’s real estate market from perspectives of households, real estate companies, banks, and non-bank financial institutions; highlights data gaps limiting comprehensive exposure assessment.

### A. Recent Developments
- Real estate price growth in 2023 moderated with segment differences:
  - Owner-occupied properties: +3 percent for apartments; +1 percent for single family houses.
  - Residential investment properties: -2 percent.
  - Commercial real estate (CRE): -4 percent for office and industrial spaces; stagnation for retail space.
  - Overall segment adjustments ranged between -4 percent and 3 percent.
- Long-term: price increases since 2007 aligned with those in other advanced economies.
- Housing market tightness and supply constraints:
  - Vacant dwellings: 1.2 percent of total dwelling stock (as of 2023).
  - Swiss population growth (2012-2022): 10 percent.
  - Models indicate overvaluation of house prices by 15 to 40 percent, with potential upward bias due to supply constraint challenges.
- Mortgage origination and stock:
  - New mortgage origination volume declined by 2.9 percent in 2023.
  - Sectoral origination changes in 2023:
    - Owner-occupied properties: -9.8 percent.
    - Rented out residential properties (household): -6.8 percent.
    - Residential property mortgages to company borrowers: +16.7 percent.
      - Note: 16.7 percent growth driven mostly by increase in size of jumbo mortgages to companies; 90th percentile size experienced an 18 percent increase.
  - Annual growth rate of mortgage stock: from 3.5 percent in 2022 to 2.5 percent in 2023.
  - Mortgages account for around 85 percent of lending by all domestic banks.

### B. Owner-Occupied Residential Market — Household Balance Sheets and Cashflows
- Household debt and assets:
  - High household debt-to-income ratio driven by mortgage debt.
  - Swiss law does not mandate amortization of mortgages below two thirds of underlying property value.
  - Average household mortgage leverage: CHF 0.42 per CHF 1 of real estate assets in 2011 → CHF 0.36 in 2022.
  - Cash and deposits to mortgage debt: 95.4 percent in 2011 → 101.2 percent in 2022.
- Affordability and arrears:
  - Housing expenditure share of disposable income in 2022: 24.7 percent (EU average: 19.6 percent).
  - Arrears rate related to housing: 5.0 percent in 2012 → 7.1 percent in 2022.
  - Housing expenditure includes mortgage, rent, utility bills or hire purchase.

### C. Investment-Purpose Real Estate (IPRE) Market
- Size and composition:
  - Estimated size of professionally-managed real estate market: 43 percent of GDP in 2022 (second among major advanced economies).
  - Market size growth since 2010: 87 percent (second among major advanced economies).
  - IPRE composition (2022): Residential 48 percent; Office 31 percent; Retail 14 percent.
- Profitability and valuation changes:
  - CRE companies’ ROA: above 3 percent in 2022 → around 1 percent in 2023 H1.
  - Between 2018–2022, property revaluation gains contributed on average 28 percent of operating profits.
  - In 2023 H1, revaluation losses reached as high as 85 percent of operating profits.
  - 2018–2022: property revaluation gains averaged about 1.7 percent of total book value of assets per year.
  - 2023 H1: revaluation loss constituted 0.5 percent of total book value of assets.
  - Revaluation gains accounted for 48.1 percent of total rental income (2018–2022); revaluation losses amounted to 27.7 percent of total rental income in 2023 H1.
- Data and sample notes:
  - Analysis based on annual reports of the four largest listed IPRE companies in Switzerland from 2018 to 2023 H1.
  - As of end-2023, combined market value of these top four CRE companies >65 percent of value of all listed CRE companies in Switzerland.
  - Book value of assets managed by the leading four CRE companies ≈ 4.5 percent of Swiss GDP in 2022.
  - Average property mix for the four CRE companies: residential 20 percent; office and retail 80 percent.
- Financing costs and coverage:
  - Average interest rate on financial liabilities declined by 0.7 percentage point from 2018 to 2021, then increased by 0.4 percentage points since 2022.
  - Newly-issued corporate bonds average interest rate: 0.25 percentage points in 2021 → 1.90 percentage points in 2023H1.
  - Interest-coverage ratio: 13.7 (2018–2021 benchmark) → 9.4 in 2023 H1.
    - Interpretation: average annual rental income could cover financial expenses for up to 13.7 years previously, and up to 9.4 years by 2023 H1.
- Default risk:
  - Forward-looking probability of default (PD) from Credit Research Initiative (CRI) remains low for publicly-traded Swiss IPRE firms despite increases in 2023.
  - CRI model built on forward intensity model by Duan et al. (2012).

### D. Financial Sector Exposures to Real Estate Markets
- Banking sector exposures:
  - Mortgage-to-GDP ratio (2022): 148 percent.
  - Mortgage composition of the mortgage stock:
    - Owner-occupied residential properties: 62.3 percent.
    - Investment-purpose residential properties: 23.0 percent.
    - CRE: 14.7 percent.
  - Variation across banks: smaller banks on average have higher exposures; some smaller banks specialize in CRE lending.
- Non-mortgage exposures and data gaps:
  - Secured mortgage borrowing by large IPRE firms declined from 30 percent in 2021 to 15 percent in 2023H1 as firms used more credit lines and corporate bonds.
  - Banks hold more than 9 percent of corporate bonds issued by the largest four IPRE firms, making them the second-largest investor group per disclosed information.
  - Full extent of banking sector’s total exposure via credit lines and corporate bonds is difficult to assess due to data limitations.
  - SNB and FINMA plan a supervisory loan-by-loan dataset on banks’ exposures to non-banks, with more than 90 percent coverage (smallest banks exempted).
- Insurance sector exposures:
  - Real estate properties: 9 percent of total assets managed by Swiss insurance companies in 2022.
  - Mortgages: 7 percent of total assets.
  - Total real estate exposure: 16 percent of total assets (EU insurance companies average: 7.5 percent).
  - Life insurance companies: 14 percent of portfolio in real estate properties; mortgages constitute 11 percent of total assets.
  - Health insurers: 31 percent of portfolio in commercial real estate.
  - Some non-life and health insurers have commercial real estate shares exceeding 60 percent.
  - Indirect exposures via participations in real estate firms and investments in real estate funds each account for less than 1 percent.
  - Foreign real estate exposure: 2 percent of real estate portfolio located outside Switzerland (i.e., 98 percent located in Switzerland).
- Pension funds:
  - Direct allocation to real estate: 22.8 percent of total assets in 2022.
  - Mortgages allocation: 3.0 percent of total assets.
  - Breakdown of direct real estate allocations:
    - Domestic direct real estate holdings: 8.4 percent.
    - Unlisted collective investments: 7.0 percent.
    - Listed real estate funds: 3.5 percent.
    - Real estate abroad: 3.9 percent.

*Source: 1cheea2024002 - References (Selected Issues Paper excerpt on Switzerland: Real Estate Markets and Vulnerabilities).*

### 25.8 percent, far exceeding the EU pension fund average of 7.3 percent.

### 25.8 percent, far exceeding the EU pension fund average of 7.3 percent.

### Price growth and housing market dynamics
- Price growth in Switzerland moderated in 2023 with segmental differences:
  - Owner-occupied properties: continued price increases at a moderated pace.
  - Residential investment properties and CRE: experienced declines.
- Housing market tightness and supply-demand drivers:
  - Low vacancy rates.
  - Prices supported by demand pressures and stagnant supply, reflecting high population growth and declining building production.
- Mortgage origination and interest rate effects:
  - Higher interest rates have slowed new mortgage origination.
  - The mortgage adjustment in Switzerland has been more modest than in Europe.

### Household debt, assets, and cashflow pressures
- High household indebtedness:
  - Switzerland’s debt-to-income ratio is higher than that of many other countries, primarily due to mortgage debt.
- Mitigating asset position:
  - Swiss households have high net wealth relative to their disposable income.
  - Households maintain a significant amount of liquid financial assets.
- Cashflow tensions and arrears:
  - Some tensions in household cashflows due to high housing expenditure as a share of income.
  - Housing-related arrears are lower than the EU average but have shown a modest increase in the past decade, indicating growing financial pressures from housing expenses.

### Institutional real estate markets (IPRE)
- Market size and growth:
  - Size of the IPRE market was 43 percent of GDP in 2022.
  - Since 2010, the market size of professionally-managed real estate has grown by 87 percent.
- Profitability and financing pressures in 2023:
  - Profitability of IPRE firms declined in 2023 because of the devaluation of IPRE properties, likely due to higher interest rates.
  - Interest expenses increased, adding stress on IPRE firms’ cash flows.
  - Declining share of secured mortgage borrowing by large IPRE firms introduces pockets of risks.
  - Despite these pressures, default probabilities of IPRE firms remain low.

### Banking sector exposures to real estate
- High bank exposures overall, with CRE exposures more limited:
  - As of 2022, the mortgage-to-GDP ratio stood at approximately 148 percent.
  - Breakdown of the mortgage-to-GDP ratio:
    - 62.3 percent was for owner-occupied residential properties.
    - 23.0 percent was for investment purpose residential properties.
    - 14.7 percent was for CRE properties.
- Data limitations:
  - Full extent of banking sector exposures to real estate is uncertain due to limitations in capturing non-mortgage lending (credit lines, corporate bonds) and cross-border markets.

### Insurance companies and pension funds’ real estate exposures
- Insurance companies:
  - In 2022, real estate properties constituted 9 percent of total assets managed by Swiss insurance companies.
  - Mortgages accounted for another 7 percent of insurance companies’ assets.
- Pension funds:
  - Swiss pension funds allocated 22.8 percent of total assets directly into real estate in 2022.
  - An additional 3.0 percent was allocated into mortgages.
  - Other pension fund exposures to real estate (e.g., via equity and bonds) are less clear due to data limitations.
- Comparative context:
  - NFFIs exposures to real estate are high compared with other countries.
  - Cross-border direct real estate holdings are limited.
- Highlighted figure note:
  - The chapter references a portfolio allocation figure showing pension funds’ and insurance companies’ exposures across asset categories, including "Real estate", "Mortgages", "Fixed income securities", "Equities", "Alternative investments", and others.

### Conclusions (summary of risks and mitigants)
- Mixed housing market developments: moderated overall price growth in 2023 with declines in some segments.
- Balance of risks:
  - Household risks from high mortgage debt are mitigated by high net wealth and liquid financial assets.
  - Rising interest expenses and property devaluations have exerted pressure on IPRE profitability and cashflows.
  - Banks have high exposures to real estate overall, though CRE exposure is a smaller share of mortgage portfolios.
  - Pension funds and insurance companies have meaningful direct real estate exposures, with pension funds’ direct real estate allocation at 22.8 percent and an additional 3.0 percent in mortgages in 2022.
- Data limitations constrain full assessment of cross-sector and cross-border real estate exposures, particularly for non-mortgage instruments.

*Source: Switzerland chapter, IMF country report (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1cheea2024002.pdf_