Swiss Housing Market Bubble Looms Closer, UBS Says

Switzerland’s property market is at greater risk of overheating, raising the question as to whether authorities have done enough to curtail the boom.

The UBS Swiss Real Estate Bubble Index rose to 1.23 points in the fourth quarter from 1.2 points in the third, according to a statement from UBS AG today. A reading above 2 indicates a bubble.

“The potential for correction has increased further,” Matthias Holzhey and Claudio Saputelli at UBS in Zurich said.

The Swiss National Bank’s policy of zero rates, in place since August 2011, has kept down the cost of taking out a mortgage. Coupled with high immigration from neighboring European countries that has fueled a strong increase in real estate prices in Switzerland.

Growth in mortgages has exceeded that of economic output since 2009, and last year price gains of homes and apartments outstripped advances in incomes, according to the central bank.

Concerned Switzerland could fall victim to a real estate crisis similar to that of the 1990s, the government last year forced banks to build up a countercyclical buffer of 1 percent of mortgage-related assets. After that failed to prevent a further deterioration of the mortgage market, it last month doubled the requirement to 2 percent. Even so, it refrained from raising it to the maximum 2.5 percent. Banks have until June 30 to comply.

Risky Regions

According to Holzhey and Saputelli, regulatory steps such as the countercyclical buffer have the shortcoming of not being able to take into account a varying state of affairs across the country.

“On a regional basis, additional regulatory measures could result in an exacerbation of the imbalances,” they said. For example, tougher lending criteria could constrain credit and intensify already falling prices in an area, or they could cause buyers to shift to lower-cost regions, and spur the overheating, the authors of the report said.

According to the UBS index, 17 regions are considered particularly risky, with the Martigny region in western Switzerland being added this quarter.

Tackling property-market imbalances via interest rates is not an option for authorities at the moment. The benchmark interest rate must stay at zero so as not to jeopardize the cap of 1.20 per euro set on the franc in 2011, SNB Vice President Jean-Pierre Danthine said in a newspaper interview this month.

Rules governing whom banks may lend to may also get tightened, the SNB said last month when it announced the increase to the buffer.

Historical Precedent

Most mortgages in Switzerland are with cantonal and regional banks. Globally active banks UBS AG and Credit Suisse Group AG held only 27 percent of mortgages in November, central bank data shows.

Rates for fixed-rated mortgages rose in 2013, according to the barometer published by Comparis for the fourth quarter, with the average price 35 percent higher than in 2012. The rate for a 10-year fixed rate mortgage increased to 2.7 percent from 2 percent, it said.

Two decades ago, an overheating of the real estate market caused bank failures -- including Spar- und Leihkasse Thun and Solothurner Kantonalbank -- and pushed the economy into recession. Since 2008, mortgages outstanding to Swiss private households have increased 25 percent and apartment prices have risen 28 percent, data published by the central bank shows.

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 ($7.1 billion) to the aggregate mortgage burden, a sum equal to 1.1 percent of gross domestic product, according to a report published in September.

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 GDP, and the proportion of credit applications by UBS clients for residential property not intended for owner occupancy.

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