Will Switzerland's red-hot housing market boil over?
A surge in housing prices suggest a bubble is forming, as low interest rates fuel mortgage lending and immigrants stoke real estate demand
Reuters in Kuesnacht, Switzerland
On the "Gold Coast" of Lake Zurich, modern glass and concrete apartment blocks with private speedboat docks crowd the waterfront. Some seem awkwardly large for their lots, as though muscling in on the belle epoque villas next door.
These new buildings symbolise a housing boom that is giving Swiss authorities a headache as they fight to keep a lid on the franc currency, which rose sharply in value last year as investors sought shelter from the euro-zone debt crisis.
With the Swiss National Bank unable to lift the ultra-low interest rates that have helped fuel rising house prices without risking a fresh franc surge, the Swiss are betting on new regulation to let some air out of the market.
But that may not be enough to prevent further inflation in property prices. In Kuesnacht, site of the Gold Coast, a scarcity of land means even modest, outdated homes can now cost several million francs. Developers typically tear down the existing properties, replacing them with luxury flats.
"There's definitely the danger of a real estate bubble," said Rudolf Minsch, chief economist of business lobby economiesuisse. "There are some signs we're in a state of overheating."
According to SNB data, prices for owner-occupied flats and homes have risen by roughly 20 per cent since the financial crisis erupted in 2008. The number of permits for building issued in Swiss towns and cities meanwhile rose 13.5 per cent on the year in the first quarter of this year.
Real estate stocks have also surged, with property investment firms such as Swiss Prime Site and PSP Swiss Property, outperforming the wider market this year.
Switzerland last tightened lending standards a decade ago after suffering a housing market collapse in the 1990s that forced the closure of a bank and dented growth.
Between 1988 and 1992, Swiss house and flat prices rose about 10 per cent as the central bank loosened policy in response to the 1987 stock market crash, while credit growth exploded by more than 40 per cent.
Switzerland's current property price rises pale in comparison to eye-popping increases of more than 100 per cent in Spain and 300 per cent in Ireland before the 2008 crash.
Yet by the standards of Switzerland, where a variety of regulatory measures curb speculative investment, and which prides itself on stability and predictability, the current rise in prices and credit growth is unusually strong.
According to the SNB, household loan growth has risen about 20 per cent from four years ago and competition among mortgage lenders is fierce. Mortgage loans by banks are now equal to 130 per cent of gross domestic product, up about 10 percentage points from a decade ago, according to a calculation by Die Volkswirtschaft, a publication of the economy ministry.
Swiss financial regulator FINMA warned this year that banks were increasingly granting exceptions and giving loans to people who would not previously have qualified for them.
Evidence that credit quality is deteriorating has also prompted calls for caution from the Organisation for Economic Co-operation and Development (OECD) and the global Financial Stability Board, which said a pile up of dud mortgages could threaten the financial system.
Last month, ratings agency Standard & Poors downgraded its outlook on nine Swiss banks with big mortgage books, citing real estate market imbalances. Responding to these danger signals, FINMA and the government brought new rules into force from July 1 that incorporate best practice guidelines set out by the Swiss Bankers' Association, supplementing existing curbs on speculative buying.
Under the new rules, borrowers must make a 10 per cent cash down payment, and are forbidden to finance the purchase entirely with their statutory retirement savings. Mortgages must also be steadily paid down to two-thirds of the principal's value over two decades, with no leniency granted in expectation that property prices will rise.
Banks found not to have adhered to the new requirements will have to boost their capital to offset the higher risk. The SNB will also be able, with the government, to trigger an additional capital buffer to safeguard against mortgage book risks.
How effective these measures will be remains to be seen.
"It's too early to say. Only the new loans are affected," said FINMA spokesman Tobias Lux.
"But we can say, based on feedback we're getting, that banks are taking it seriously."
Meanwhile, immigration is driving demand for property and has helped push the average price of a Swiss home to more than 800,000 Swiss francs (HK$6.35 million), says consultancy Wuest & Partner.
But there are signs already that the heat may be coming out of the market, with the UBS real estate index inching away from the "risk" zone in the second quarter.
It may still be too early to sound the all-clear, though.