Swiss House Market Risks Increased in Second Quarter: UBS

Risks to the Swiss real estate market intensified in the second quarter, raising questions as to whether authorities have done enough to prevent an overheating of the country’s property market.

The UBS Swiss Real Estate Bubble Index rose to 1.20 points in the second quarter, from 1.17 points in the first, according to a statement from UBS AG today. A reading above 2 would indicate a bubble.

“The risks have again increased,” Matthias Holzhey and Claudio Saputelli at UBS in Zurich said, adding that the leveling off of the index’s rise meant that the probability of “a speculative real estate bubble” had fallen. Even so, “the risk of a price bubble is likely to increase again in the coming quarters,” they said.

Swiss house and apartment prices have soared in recent years, with mortgages kept cheap by the Swiss National Bank’s loose policy. The central bank has held its benchmark interest rate at zero since August 2011 and in September of that year capped the franc at 1.20 per euro to shield the economy from the crisis in the neighboring euro region.

Strong demand for housing, stemming in part from a high number of skilled immigrants from neighboring European Union countries, has helped the construction industry grow faster than the economy as a whole in the past year, government data show. Thanks to robust consumer spending, Swiss growth outpaced Germany’s in the first quarter.

Crisis Repeat

The KOF barometer, which seeks to predict the strength of the economy in six months’ time, indicated that construction was the main driver of the economy in July. According to the UBS statement, second-quarter mortgage volume increased 4.3 percent from a year earlier, exceeding a rise in disposable household income of just 1.4 percent.

The regions considered particularly risky included Zurich, Geneva, Lausanne, Lucerne, and Zug, according to the statement.

Keen to prevent a repeat of the property market crisis of the 1990s, which hobbled economic growth for years, the SNB has sounded the alarm about overheating and was behind the introduction of a capital buffer for banks in February.

In June, SNB Vice President Jean-Pierre Danthine said he hoped the economy would manage a soft landing and that a further build-up of property risks could prompt the SNB to take further regulatory measures. The SNB was regularly assessing whether an adjustment of the capital buffer would be needed, Danthine also said.

Mortgage Costs

The central bank may well ask the government to increase the buffer this year, the newspaper Schweiz am Sonntag reported yesterday, citing unidentified people familiar with the SNB’s thinking.

Currently, the buffer of additional capital is set at 1 percent of risk-weighted assets tied to residential mortgages to guard against losses on loans; it can be increase to as much as 2.5 percent. The rules, with which banks must comply by October, follow guidelines set out a year ago to discourage risky lending.

In a sign banks may be starting to pass on the higher costs to clients, the cost of a 10-yr fixed-rate mortgage rose to 2.6 percent at end of the second quarter, compared with 2.2 percent three months earlier, said on July 16.

In the 1990s, a collapse in house prices tipped the economy into recession and caused the failures of banks including Spar-und Leihkasse Thun and Solothurner Kantonalbank.

The UBS real estate 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.

Before it's here, it's on the Bloomberg Terminal.