Switzerland’s central bank has a message for lenders: act now to stem surging credit growth or face further restrictions.
The government, at the urging of the Swiss National Bank, yesterday ordered banks to hold additional capital as a buffer against risks posed by the country’s biggest property boom in two decades. The amount, set at 1 percent of banks’ risk-weighted assets tied to domestic residential mortgages, can be increased to as high as 2.5 percent.
“The measure is a warning shot at banks that were overgenerous with their credit lending,” said Janwillem Acket, chief economist at Julius Baer Group Ltd. in Zurich. “The government and the SNB want to tell banks to be more restrictive or we’ll tighten the reins further.”
Governments from Singapore to Dubai are seeking measures to cool overheated property markets after central bankers lowered interest rates to stimulate their economies. While Swiss policy makers in July toughened rules on mortgage lending to avoid a repeat of a housing collapse that crippled the economy in the early 1990s, the SNB requested the buffer after “imbalances intensified further” in the second half.
The measure will be imposed on all Swiss banks as well as subsidiaries of foreign banks operating in the country. Lenders will have to add about 3 billion francs ($3.27 billion) to comply with the new rules, which will be enforced starting Sept. 30, according to the government. Policy makers will “continue to closely monitor developments” and “regularly reassess the need to adjust the level,” the SNB said.
Property prices have surged in Switzerland as investors funnel money into one of Europe’s most stable economies amid the sovereign debt crisis and record-low interest rates. The SNB has kept borrowing costs at zero after introducing a franc ceiling of 1.20 versus the euro in September 2011 to stop investors from piling into a currency perceived as a haven.
The buffer level of 1 percent “reflects the fact that the current imbalances are still smaller than those immediately prior to the onset of the real estate and banking crisis at the end of the 1980s,” the SNB said yesterday.
Even at its current level, the buffer will probably make mortgages more costly and require higher down-payments, said Alexander Koch de Gooreynd, an associate at broker Knight Frank LLP responsible for Switzerland. The size of loans may fall to 65 percent to 70 percent of a home’s value from the current level of as much as 80 percent.
“It will have an effect on the market below 5 million francs,” he said by telephone. “Home prices will probably decline. Somewhere between two and five percent is realistic over 2013 because there’s not as many international people.”
Swiss property prices have been pushed higher by the influx of about 50,000 people a year, attracted by the country’s low unemployment, higher incomes and economic growth.
“The measures on their own are unlikely to significantly slow down mortgage lending growth,” Fitch Ratings analysts Christian Kuendig and Cynthia Chan said in a note today. “Mortgage interest rates will still be significantly lower than in the early 1990s, the peak of the last real estate cycle, even if the higher cost of capital were to be fully passed on to customers.”
As much as 25 percent of the country’s total mortgage volume will be affected by the buffer, Swiss Finance Minister Eveline Widmer-Schlumpf said at a briefing in Bern yesterday. “We want to counter preemptively the possibly difficult consequences of a bubble,” she said. “If the situation stabilizes, we can abolish it the same way we introduced it.”
The Swiss are following other governments taking steps to cool rising prices and avert property bubbles. The United Arab Emirates central bank, which oversees seven emirates including Dubai, decided in December to limit mortgages to foreigners to 50 percent of the property’s value.
Singapore last month increased the transaction tax for homes by 5 percent to 7 percent after low interest rates pushed prices to a record high in the fourth quarter. The government will also tighten the loan-to-value limits for buyers seeking a second mortgage.
Hong Kong monetary chief Norman Chan said this month that more steps may be taken to cool the city’s real-estate market as rising household debt adds to risks from property-price gains over the past four years. The Hong Kong Monetary Authority has already rolled out five measures after prices doubled since the start of 2009, according to a weekly index compiled by Centaline Property Agency Ltd.
The average asking price for a single-family home in Switzerland has advanced 26 percent since the end of 2006, according to an index published by property consultant Wueest & Partner AG. In Zurich, home to companies including UBS AG and Swiss Re AG, they’ve risen 36 percent in that period, while the region around Lake Geneva reported a 55 percent increase.
The UBS Swiss Real Estate Bubble Index remained in the so-called risk zone for a second quarter in the three months through December, according to an indicator published on Feb. 4. Zurich and Geneva along with Lausanne, in the country’s French-speaking part, are the most at risk of a bubble, according to UBS.
The government’s new rules won’t have much of an impact, said Bruno Birrer, chief operating officer at Peach Property Group AG, a luxury home developer in Zurich.
“The market is really strong,” he said in a telephone interview. “From time to time, you’ll have somebody saying there’s a bubble coming but, as always, we have a strong and solid economy here, so we’re not afraid about that.”
The direct influence of the buffer on mortgage rates may be low, with costs increasing less than 0.1 percent, said UBS economists Matthias Holzhey and Fabio Trussardi. What’s more important is that the measure “sends a signal,” they said. “Risk sensitivity, and as a result, the risk premiums are likely to increase.”
“This is a first step, giving the SNB the opportunity to expand the buffer should it consider it necessary,” said Alexander Koch, an economist at UniCredit in Munich.
UBS and Credit Suisse Group AG, Switzerland’s two largest banks, had combined outstanding mortgages of 252.2 billion francs at the end of November, up 4.8 percent from the end of 2011, according to SNB data, while cantonal banks, which are largely owned by the regions, had 288.6 billion francs in mortgages, up 4.7 percent. Banks including cooperative-based Raiffeisen lenders, foreign and regional banks, had mortgage claims totaling 834.1 billion francs, up 4.3 percent.
For larger banks such as Credit Suisse and UBS, “the impact will be so small that the banks can manage it,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “For smaller banks, the situation is a bit more delicate because Swiss mortgages are their core business.”
The SNB said in June that the mortgage market poses a significant risk to lenders. The government toughened lending rules the following month, forcing borrowers to supply at least 10 percent of the value of the property from their own funds without using pension assets and requiring mortgages to be paid down to two-thirds of the lending value within 20 years.
The SNB has “limited scope” for an increase in the benchmark interest rate at the moment as it protects the economy and defends the franc, it said yesterday in a statement. The Zurich-based central bank will hold its next quarterly assessment of monetary policy on March 14.
Michael Landolt, an economist for the Swiss homeowners association, said mortgage rates probably will increase because of the measures, though they’ll still be historically cheap.
“It’s very Swiss that everyone has to pay for the shortcomings of a few,” he said. “Now all mortgage borrowers are paying for the fact that banks are undercapitalized. The regulators could have picked the banks that are lending too aggressively and applied the rules only to them.”