Swiss Real Estate Market Imbalances Remain High, Danthine Says

The Swiss real estate market continues to be a threat to the country’s financial stability, Swiss National Bank Vice President Jean-Pierre Danthine said.

“Imbalances in the housing markets have stabilized at high levels only, and the risks of a further build-up remain substantial, not least given the current environment of negative interest rates,” he said in Geneva on Tuesday. “Should there be renewed signs of a further build-up, I am confident that we could contain the problem.”

Switzerland’s years of low borrowing costs have fostered a boom in the real estate market, leading to concerns about overheating. The SNB’s January decision to abolish its cap on the franc and instead cut the deposit rate to minus 0.75 percent has helped keep mortgage rates low.

At the central bank’s behest, the government is now forcing banks to hold additional capital as a buffer to guard against mortgage writedowns. The countercyclical buffer, currently at 2 percent of risk-weighted assets linked to domestic residential mortgages, can be raised as high as 2.5 percent.

SNB policy makers have said they decided to abolish the cap on the franc because maintaining it would have required huge interventions, with little concomitant benefit to the economy. Still, SNB officials have in recent months repeatedly threatened to conduct foreign-exchange interventions if necessary to weaken the franc in order to maintain adequate monetary conditions.

Among major central banks, the SNB already has the largest balance sheet in relative terms, with assets at more than 90 percent of annual Swiss GDP, Danthine said.

“This does not mean that the SNB will refrain from expanding its balance sheet further, should it prove necessary,” he said. “Rather, it clarifies that this policy option should be used only when the benefits clearly outweigh the costs.”

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