The UBS Swiss Real Estate Bubble Index entered the “risk zone” for the first time since 1991, putting pressure on the Swiss National Bank to take measures to curb the country’s property boom.
“Although population growth continues to favor price increases, the high price level is increasingly being supported by demand for real estate as an investment as well as by the low interest rates,” said Matthias Holzhey and Claudio Saputelli, UBS economists. “The continued strong increase in household mortgage debt is showing no signs of abatement” and the reversal of that “could trigger a price correction,” they said.
The Swiss government introduced measures in July to reduce mortgage-lending risks, including rules that will give it the discretion to raise capital requirements for all banks by as much as 2.5 percent of total domestic risk-weighted assets to target specific parts of the credit market. SNB Vice Chairman Jean-Pierre Danthine said last month that he was “uneasy” about the Swiss property market.
The SNB, which according to the rules would have to request the capital buffer for the government to act, won’t make such an application before next year, the central bank’s president, Thomas Jordan, said in August.
UBS’s Holzhey foresees the index continuing to rise next year, driven by interest rates that are “too low,” he said in a telephone interview from Zurich.
Switzerland has one of Europe’s most stable and prosperous economies, and the euro region’s sovereign-debt crisis is spurring cross-border investment. The SNB imposed a ceiling of 1.20 Swiss francs to the euro in September 2011. This, combined with rate cuts by the European Central Bank, has prevented Switzerland from tightening monetary policy to avert a property bubble.
The average Swiss household income required to buy a home rose in the third quarter. That’s due to a “renewed increase in real estate prices in the third quarter combined with stagnating income,” the analysts said. While the 5.9 times income needed to buy is up slightly from the second quarter, it’s still below the 6.8 times peak in 1990, they said.
The SNB’s decision to impose a ceiling on the franc as demand for the currency surged has made the Swiss property market more attractive for foreign investors seeking a haven for their money. At the same time, the euro’s weakness has discouraged people living in Switzerland from buying assets in other countries.
About 50,000 people a year migrate to Switzerland, where unemployment is lower and income higher than most of Europe. The tax rate of 28.5 percent of gross domestic product is below the Organization for Economic Cooperation Development average of 33.8 percent, luring foreigners to settle in the 8 million- inhabitant country. That’s leading to a drop in vacancies, boosting rent levels in Zurich and Geneva.
Those two cities together with Lausanne in western Switzerland remain the areas most at risk from residential real- estate bubbles, UBS said, citing their “national importance.”
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