SNB Gauges Bubble Risks as Euro Crisis Danger Recedes

Swiss National Bank officials are counting the cost of their zero interest-rate policy.

After more than two years of targeting three-month Libor between zero and 0.25 percent, coupled with a currency ceiling to keep the euro region’s debt crisis at bay, President Thomas Jordan and his colleagues are increasingly focused on the domestic fallout. The Swiss property market, fueled by cheap mortgages, is experiencing its biggest boom in two decades.

The SNB, which delivers its quarterly decision tomorrow, has warned of overheating in the real-estate market and earlier this year pushed the government to require banks to hold more capital to temper it. That initial step on its own may not be enough to prevent a bubble from forming, say economists including Reto Huenerwadel at UBS AG in Zurich.

“There’s a risk that they will add to their current macro-prudential measures,” he said. “The key is whether there will be a change in the language that they use. They’re going to prepare people for something, and then go to the government.”

Raising interest rates isn’t an option for the SNB as long as it wants to maintain the cap of 1.20 per euro, which has kept the Swiss franc at least two centimes below that level for almost eight months. All 22 economists surveyed by Bloomberg News predict no change in the SNB’s benchmark interest rate. Officials will also maintain the cap at the current level, all respondents to that question said.

Indispensable Cap

The SNB will publish the decision at 9:30 a.m. in Bern, along with new growth and inflation forecast. Jordan will explain the outcome at a 10 a.m. press conference.

The franc traded little changed at 1.2217 per euro at 12:27 p.m. in Zurich today. Against the dollar it stood at 88.74 centimes.

Last month, the SNB president termed the cap “indispensable,” citing falling consumer prices and the risk of the euro area’s debt crisis intensifying again. Even so, he said that the European Central Bank’s decision to cut its benchmark interest rate to a record low of 0.25 percent created a “complex situation” for the SNB.

Since 2008, mortgages outstanding to Swiss private households have increased 25 percent and apartment prices have risen 27 percent. The UBS Swiss Real Estate Bubble Index is at its highest level since 1991.

The boom is part of a wider European trend. Apartments in Germany’s largest cities may be overvalued by as much as 20 percent, the Bundesbank said on October. In the U.K., Bank of England Governor Mark Carney took action last month to restrain house-prices by ending incentives for mortgage lending.

Capital Buffer

In Switzerland, the government-mandated buffer imposed at the SNB’s request currently requires banks to hold 1 percent extra capital on their mortgage-related assets, and can be increased to as much as 2.5 percent. While SNB Vice President Jean-Pierre Danthine said last month that expectations of its effectiveness “must stay realistic,” he wouldn’t exclude additional steps.

“Further regulatory measures could become necessary,” Danthine wrote in an opinion piece in Die Volkswirtschaft magazine.

The number of apartments for sale for more than 1 million francs ($1.1 million) doubled since 2008, while the total amount on offer rose only 10 percent, according to property consultancy Wueest & Partner. Building permits for new lodgings rose 20 percent in the first quarter of this year, compared with the same period in 2012, government statistics show.

Crisis Repeat

The SNB says this increase isn’t justified by fundamentals. Private debt, primarily mortgage loans, stands at a record 170 percent of annual output, according to the SNB, which wants to prevent a repeat of the property-market crisis of the 1990s. At the time, a collapse in house prices tipped the economy into recession and caused the failures of banks including Spar- und Leihkasse Thun and Solothurner Kantonalbank.

“Existing measures to restrict credit allocation are having some effect, but we think regulators will require even more steps,” said Oliver Adler, head of economic research at Credit Suisse Group AG in Zurich. “The SNB will ask the government to raise the buffer at the beginning of next year.”

David Marmet, economist at Zuercher Kantonalbank, also says more regulation could lie in store.

“If the market doesn’t cool further, then I think maybe in the spring they will take further steps,” he said.

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