Swiss Housing Market Inches Closer to Bubble, UBS Says

Risks to the Swiss real estate market grew more severe in the third quarter, a sign authorities may weigh further steps to prevent an overheating of the residential real estate market.

The UBS Swiss Real Estate Bubble Index rose to 1.20 points in the third quarter from a revised 1.15 points in the second, according to a statement from UBS AG today. A reading above 2 would indicate a bubble.

Switzerland’s residential property market is experiencing the strongest rise in two decades, with the central bank’s loose monetary policy keeping the cost of taking out a mortgage low. The Zurich-based Swiss National Bank’s benchmark interest rate has been at at zero since August 2011.

The rate of credit growth is outpacing that of the economy, and the ratio of private debt, primarily mortgage loans, now stands at a record 170 percent of annual output, according to the SNB.

“Although economic growth in the last quarter was higher than in the previous quarter, it was unable to keep pace with the price and debt momentum on the residential real estate market,” Matthias Holzhey and Claudio Saputelli at UBS in Zurich said.

Capital Buffer

The SNB has sounded the alarm about the property market overheating in a bid to prevent a repeat of the real estate crisis of the 1990s, which stunted economic growth for years. It was behind the introduction of a capital buffer for banks in February.

The buffer of additional capital, which banks have had to comply with since Sept. 30, currently is set at 1 percent of risk-weighted assets tied to residential mortgages to guard against losses on loans. At the behest of the SNB, the government can raise it to as much as 2.5 percent.

According to UBS, the index’s increase in the third quarter was driven by an annual 4.2 percent jump in residential-property prices. The Swiss economy will grow 1.5 percent to 2 percent this year, the central bank predicts.

Residential real estate prices rose faster than household incomes in the third quarter, the survey found. The cost of a mid-priced house was 6.1 times annual household income, UBS said, above the long-term average of 5.2 annual incomes.

Damping Effect

Moreover, demand for condominiums as investment properties remained high, Holzhey and Saputelli said, adding that the proportion of loan applications received by UBS for properties not used directly by their owners had risen to 22 percent of total mortgage requests.

SNB President Thomas Jordan said in September that regulatory measures, including the buffer, were “having a damping effect,” according to an interview with Swiss Radio SRF. The central bank had the real estate market under close watch and it was too early to evaluate whether further steps might be required, he said in the interview.

In a sign demand may be cooling, the vacancy rate for Swiss dwellings rose slightly this year, the federal statistics office said in September.

According to the index, the regions considered particularly risky were unchanged in the third quarter, including Geneva, Lausanne, Zurich and Zug.

Low Rates

SNB Vice President Jean-Pierre Danthine has stressed that interest rates rising from their current lows could cause some borrowers to struggle with repayments.

The average rate for a 10-year fixed mortgage rose to 2.6 percent in the third quarter from 2.3 in the second, according to the Comparis quarterly mortgage barometer. Additionally, borrowers increasingly preferred taking out five-year mortgages, rather than 10-year loans, it said.

Credit Suisse economists calculated that a rise in the average mortgage rate by one percentage point to 3.1 percent would add 6.4 billion francs ($7 billion) to the aggregate mortgage burden, a sum equal to 1.1 percent of gross domestic product, according to a report published in September.

Switzerland is aiming to avoid a repeat of the 1990s, when 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, whose time series was revised this quarter, 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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