Swiss Property in UBS Risk Zone May Provoke Bank Rules
Switzerland’s housing market moved further into the “risk zone” at the end of 2012, increasing pressure on authorities to tighten capital rules for the country’s banks to curb a property boom.
The UBS Swiss Real Estate Bubble Index rose to 1.11 points in the three months through December from 1.02 points in the previous quarter, when it had a risk reading of above 1 for the first time since 1991, according to a statement from UBS AG (UBSN) today. A reading above 2 would indicate a bubble.
Housing prices in Switzerland have soared as investors funnel money into one of Europe’s most stable and prosperous economies amid the sovereign debt crisis. Property values climbed 6.3 percent in the 12 months through September, while they declined an average of 1.8 percent in euro-area countries, according to broker Knight Frank LLP’s Global House Price Index.
“Remarkable is the uninterrupted investor interest in real estate, reflected in the all-time high level of credit applications for properties not intended for personal use,” said Matthias Holzhey and Claudio Saputelli, UBS economists in Zurich. If the trend continues, the index “may enter the bubble zone by the end of 2014,” they said.
The Swiss government introduced rules in July to cut mortgage-lending risks, including measures that give it the discretion to raise capital requirements for banks to cool specific parts of the credit market. Such a move would come at the request of the Swiss National Bank.
The Stoxx Europe 600 Index (SXXP) rose for an eighth month in January, its longest winning streak since 1997, while the Standard & Poor’s 500 Index (SPX) rallied 5.2 percent for its best January since that year. The euro has climbed more than 2 percent against the Swiss franc this year as concern about the debt crisis eased.
“The latest recovery in financial markets and the lessening propensity of investors to seek safe havens could slow down the sharp rise in real-estate prices in the current quarter,” UBS said in the statement. “The majority of demand, however, is domestic, which means that without a significant increase in long-term interest rates, the trend is unlikely to be reversed.”
Elsewhere today, European investor confidence surged to the highest level in more than 1 1/2 years in February, adding to signs that the 17-nation euro economy is beginning to emerge from recession, the Sentix research institute said. At the same time, U.K. construction shrank for a third month in January as weak demand was compounded by a cold snap that brought snow across the country and created a drag on building projects, Markit Economics said.
China’s services industries grew last month at the fastest pace since August as gains in retailing and construction aid government efforts to drive a recovery in the world’s second- biggest economy. In the U.S., factory orders probably rose at the fastest pace in three months in December, and an index of New York-area business conditions may show a lower reading for January, according to Bloomberg surveys.
In Switzerland, policy makers have repeatedly voiced concern about developments in the country’s housing market.
“The dynamics of the real-estate market remain too strong,” SNB Vice Chairman Jean-Pierre Danthine said in an interview with Tribune de Geneve published on Jan. 24. “Our concern is to slow down this process and prevent Switzerland from experiencing a real-estate crisis similar to the one of the early 1990s.”
A collapse of Swiss real-estate prices tipped the economy into recession at the time and caused the failures of banks including Spar- und Leihkasse Thun and Solothurner Kantonalbank.
The SNB imposed a currency ceiling of 1.20 francs per euro in September 2011, which in combination with rate cuts by the European Central Bank, has prevented officials from tightening monetary policy to avert a bubble.
That’s 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 migrate to Switzerland every year, where unemployment is lower and income higher than in most other European countries. That’s leading to a drop in housing vacancies and boosting rent levels in Zurich and Geneva.
The median asking rent for a Zurich apartment in the fourth quarter was 310 francs ($340) per square meter and year, with rent for prime properties at 650 francs, according to Wuest & Partner AG. That’s a 2 percent increase from the same period a year earlier, the Swiss property consultant said in a report posted on its website.
By contrast, the average cost of renting a home in greater London increased 6.9 percent to 1,212 pounds ($1,907) a month in December from the previous year, according to a Jan. 18 index compiled by HomeLet, the U.K.’s largest referencing and rentals insurance company.
Zurich and Geneva, together with Lausanne in the west, remain the areas most at risk from residential real-estate bubbles “due to their national importance,” UBS’s Holzhey and Saputelli said.
The index comprises six sub-indicators tracking the relationships between purchase and rental prices, house prices and household income, house prices and inflation, mortgage debt and income, construction and gross domestic product, and the proportion of credit applications by UBS clients for residential property not intended for owner occupancy.
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