Swiss Real Estate Market Inches Closer to Bubble, UBS Says

Risks to the Swiss real estate market increased “marginally” in the second quarter as growth in home prices and mortgages outpaced that of income.

The UBS Swiss Real Estate Bubble Index rose to 1.24 points in the three months to end June from 1.22 points, according to a statement from UBS AG today. A reading above 2 indicates a bubble.

“Risks for the Swiss economy have thus remained virtually constant at a high level for four quarters,” Matthias Holzhey and Claudio Saputelli at UBS in Zurich said in a statement.

The Swiss National Bank’s expansive monetary policy has kept down the cost of taking out a mortgage, leading to a strong rise in residential property prices. Over the past year, mortgage growth exceeded that of the economy. At its policy review in June, the Zurich-based SNB urged banks to allot credit prudently.

Other countries have seen property market booms as well, with neighboring Germany experiencing a surge in lending that has pushed mortgage volumes to a 16-year high. To rein in runaway prices in the U.K., Bank of England Governor Mark Carney in June announced a loan-to-income cap and affordability test. The governments of Singapore and Hong Kong have also enacted cooling measures.

To prevent Switzerland from suffering a real estate market crisis similar to that of the 1990s, the government has required banks to build up capital in the form of a buffer to make them more resilient to writedowns. The countercyclical buffer was doubled to 2 percent of mortgage-related assets in January, with banks given until the end of June to comply. The buffer, which the government implemented at the behest of the SNB, can be raised as high as 2.5 percent.

Risky Regions

According to the UBS index, 18 regions were especially risky, unchanged from the previous.

SNB Vice President Jean-Pierre Danthine said in an interview last week that there were signs the property market’s rise had stopped.

“Imbalances in the real estate and mortgage market haven’t ceased to increase, except in the last quarter when they stabilized, but didn’t diminish,” he told newspaper L’Agefi in an interview.

Two decades ago, an overheating of the real estate market led to bank failures -- including Spar- und Leihkasse Thun and Solothurner Kantonalbank -- and caused a recession. Since 2008, mortgages outstanding to Swiss private households have increased 28 percent and apartment prices have risen nearly 30 percent, data published by the central bank shows.

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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