Switzerland’s Property Market Bubble Risk Intensifies, UBS Says

Risks to the Swiss real estate market increased in the third quarter, their first “significant” rise since mid 2013.

The UBS Swiss Real Estate Bubble Index rose to 1.29 points in the three months through September from 1.24 points, according to a statement from UBS AG today. A reading above 2 indicates a bubble.

“Low price increases induce a reduction of risks, only if at the same time incomes, consumer prices and rents increase more strongly,” Matthias Holzhey and Claudio Saputelli at UBS in Zurich said. “This did not occur.”

The Swiss National Bank’s expansive monetary policy has kept down the cost of taking out a mortgage, leading to a strong increase in residential property prices. 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 to make them more resilient to writedowns.

That so-called 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.

According to the UBS index, 17 regions are especially risky, with Lucerne being removed. That compared with 18 last quarter.

SNB Governing Board member Fritz Zurbruegg said in a speech last month that there were signs the property market’s rise had slowed.

Low Rates

“We are very aware that financial stability risks can emerge during this period of low interest rates,” Zurbruegg said. “We see that we have some moderation in the housing market prices and in the mortgage rates.”

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.

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.