Swiss Find Goldilocks Formula in House Market Case Study

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When it comes to the housing market, the Swiss might be achieving what Goldilocks wanted in a porridge: getting it just right.

Unable to raise interest rates for fear of pushing up the franc, authorities tackled a residential property boom with regulatory measures aimed at reining in exuberance. Three years on, the Swiss National Bank can claim some success for now.

That makes Switzerland stand out for its implementation of macroprudential policies, a growing area of focus for European officials looking at how to contain asset markets with tools less blunt than interest rates. It’s a welcome achievement for the Swiss after the SNB faced criticism this year for causing market turbulence when it ended its flagship currency cap.

“They were able to cool the market without there being a panic of prices falling and a selloff,” said Fredy Hasenmaile, head of property research at Credit Suisse Group AG in Zurich. “Switzerland has undertaken quite a few measures. Internationally, only two countries -- Singapore and Hong Kong - - have done something similar.”

The actions, spearheaded by the SNB and regulator Finma, included tougher mortgage rules, such as restrictions on use of pension pots for downpayments. Repayment times were shortened and, at the SNB’s behest, the government forced banks to hold more capital as a buffer against home loan writedowns.

Change in Tone

The measures slowed increases in home values and credit, which had outstripped economic expansion in prior years. Price gains for owner-occupied apartments weakened to about 3 percent in 2013 and 2014 from an annual average of 5 percent between 2007 and 2012, according to SNB data. Mortgage growth cooled to

3.5 percent last year from 5 percent in 2013.

“Should there be renewed signs of a further buildup, I am confident that we could contain the problem,” Jean-Pierre Danthine, the outgoing official in charge of financial stability at the SNB, said May 19. That’s a change in the tone from 2013, when he warned of a “state of high vulnerability.”

The central bank will update on mortgage risks on Thursday when it presents its annual Financial Stability Report. The OECD has praised Switzerland, saying this month that the “activation of several macroprudential instruments in recent years has helped cool the housing market.”

One reason for Switzerland’s success may be size. An ECB paper last month noted that macroprudential tools might work best in smaller countries, though the evidence is mixed.

Small Economies

“Macroprudential rules can’t just be imported; there isn’t the one-size-fits all situation of monetary policy,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and author of a book on the subject. “The nature of risk in a small economy is very different.”

Fitting that criteria is Singapore, where the government began introducing property curbs in 2009 in response to potential overheating. That led prices of homes to decline.

Switzerland also stands apart from other European countries like the U.K. or Sweden for its low home-ownership rate -- about 40 percent. That might make housing less sensitive to interest-rate changes and reduces volatility.

Eric Scheidegger, the government’s chief economist, insists Switzerland succeeded because it got the mix right.

Regulators “progressed very carefully and systematically, with the knowledge that you shouldn’t intervene too heavily or too fast,” he said in an interview.

Hong Kong

Not all such interventions work. In Hong Kong, curbs to quell demand have had little effect on prices, and affordability worsened last year. Measures in Spain at the start of the century requiring banks to make provisions for losses when loans were granted rather than waiting for them to sour failed to stop a boom turning to bust.

“A lot depends on the set-up and the timing,” said Hui Shan of Goldman Sachs Group Inc. in New York. “Once housing prices go up, up, up, it’ll be hard for policy makers to develop a policy that stops it.”

The Bank of England’s committee for macroprudential policy put restrictions on mortgages last year to prevent an “unsustainable” debt buildup, though a shortage of housing supply has meant continued upward pressure on prices. Neverthless, almost 80 percent of economists in a survey said it shouldn’t take steps again at its quarterly meeting this month.

Both Sweden and Norway have enacted counter-cyclical buffers for banks and higher capital requirements. They also put loan-to-value caps on mortgages and want to make more homeowners pay off loans faster to cool debt growth. Credit Suisse’s Hasenmaile says those measures are less stringent than Switzerland’s -- and haven’t succeeded in damping price gains. Norway on Monday announced additional regulation on mortgage lending to curb household debt and house price growth.

With modern macroprudential policy still in its infancy, there is a danger that too much interference could even breed problems, Barwell says. But authorities may have little choice to proceed, carefully, even when such policies remain unrefined.

“Policy makers can’t afford to sit and wait for decades until they’ve come up with a macroprudential framework,” he said. “Another crisis could come along.”