Switzerland’s Real Estate Market Edges into ‘Risk Zone’

on Nov 6, 2012
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**UBS Bubble Index in ‘Risk Zone’ for First Time Since 1991**

In an effort to prevent a further increase in real estate prices and home mortgage loans, which have already grown 20 per cent in the past four years, the Swiss Financial Market Supervisory Authority (FINMA) toughened up mortgage-lending standards in July. Despite the regulator’s move, however, recent data suggests that the Swiss housing market shows growing signs of overheating, with property prices rising too fast at a time when consumer prices are declining and personal income remains stagnant — factors fuelling concerns over a real estate bubble building in the Swiss housing market.

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The UBS Swiss Real Estate Bubble Index, which comprises six sub-indices, tracking the relationships between different indicators including purchase prices, house prices, household income, inflation and gross domestic product, entered the ‘risk zone’ for the first time since 1991. The bubble index climbed to 1.02 in the three months through to September from 0.82 in the previous quarter. This increase of 0.20 points pushed it above the level of 1.0, which is considered the threshold for risk emergence in the housing market, and closer to 2.00 index points, where economists would speak of a bubble, said Swiss investment bank UBS, which compiled the index.

!m[Swiss Real Estate Bubble Index Rebounds in Q3, Increasing Chance of SNB Action](/uploads/story/727/thumbs/pic1_inline.png)The regions which have seen the sharpest residential price rises in Switzerland during the third quarter of the year include the metropolitan areas of Zurich and Lausanne, where prices increased by 3.8 per cent. Low-tax locations like the Alpine region and Zug registered even higher price rises of 5.1 per cent, while in the tourist resort Davos was recorded the biggest price increase of 7.6 per cent, the UBS index showed.

**Continued Rise but No Immediate Bubble**
UBS economist and co-author of the recent report, Matthias Holzhey, warned that prices are likely to continue their upwards movement in the next year. Yet he sees no immediate risk of a real-estate bubble.
“For a bubble we’d need much stronger increases as well as an acceleration of the trend,” Holzhey explained. He added, however, that a price correction may be triggered by some factors such as an oversupply of real estate, a credit crunch, an unexpected high increase in interest rates or a sharp decrease in immigration.

Even though the index is currently well below its peak of 2.5, reached in 1991 at the height of the previous Swiss real estate price bubble, according to head of UBS’s real estate research unit Claudio Saputelli, further price gains should increasingly be seen as overvaluation.
**SNB May Enact Capital Buffer for Banks to Prevent Bubble**
The Swiss National Bank (SNB), which according to the rules would have to request a capital buffer for the government to act when signs of a real-estate bubble are building in the housing market, has been reluctant when it comes to applying the measure. In August this year, SNB president Thomas Jordan even stated that the central bank will not make a move before next year. Yet taking into consideration the latest property market data, many analysts expects the SNB to recommend that the government impose a counter-cyclical capital buffer earlier than anticipated.

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