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Swiss banks told to rein in lending or face restrictions as bubble fears grow

Swiss measure intended to curb credit growth, and is likely to push up down payments for buyers and reduce size of mortgages available

PUBLISHED : Wednesday, 20 February, 2013, 12:00am
UPDATED : Wednesday, 20 February, 2013, 4:40am

Switzerland's central bank has a message for lenders: act now to stem surging credit growth or face further restrictions.

The government, at the urging of the Swiss National Bank, last week ordered banks to hold additional capital as a buffer against risks posed by the country's biggest property boom in two decades. The amount, set at 1 per cent of banks' risk-weighted assets tied to domestic residential mortgages, can be increased to as high as 2.5 per cent.

"The measure is a warning shot at banks that were overgenerous with their credit lending," said Janwillem Acket, chief economist at Julius Baer Group in Zurich. "The government and the SNB want to tell banks to be more restrictive or we'll tighten the reins further."

Governments from Singapore to Dubai are seeking measures to cool overheated property markets after central bankers lowered interest rates to stimulate their economies. While Swiss policymakers in July toughened rules on mortgage lending to avoid a repeat of a housing collapse that crippled the economy in the early 1990s, the SNB requested the buffer after "imbalances intensified further" in the second half.

The measure will be imposed on all Swiss banks as well as subsidiaries of foreign banks operating in the country. Lenders will have to add about 3 billion francs (HK$25 billion) to comply with the new rules, which will be enforced from September 30, according to the government. Policymakers will "continue to closely monitor developments" and "regularly reassess the need to adjust the level", the SNB said.

Property prices have surged in Switzerland as investors funnel money into one of Europe's most stable economies amid the sovereign debt crisis and record-low interest rates. The SNB has kept borrowing costs at zero after introducing a franc ceiling of 1.20 versus the euro in September 2011 to stop investors from piling into a currency perceived as a haven.

The buffer level of 1 per cent "reflects the fact that the current imbalances are still smaller than those immediately prior to the onset of the real estate and banking crisis at the end of the 1980s", the SNB said.

Even at its current level, the buffer will probably make mortgages more costly and require higher down payments, said Alexander Koch de Gooreynd, an associate at broker Knight Frank responsible for Switzerland. The size of loans may fall to 65 per cent to 70 per cent of a home's value from the current level of as much as 80 per cent.

"It will have an effect on the market below 5 million francs," he said. "Home prices will probably decline. Somewhere between 2 and 5 per cent is realistic over 2013 because there's not as many international people."

Swiss property prices have been pushed higher by the influx of about 50,000 people a year, attracted by the country's low unemployment, higher incomes and economic growth.

"The measures on their own are unlikely to significantly slow down mortgage lending growth," Fitch Ratings analysts Christian Kuendig and Cynthia Chan said in a note. "Mortgage interest rates will still be significantly lower than in the early 1990s, the peak of the last real estate cycle, even if the higher cost of capital were to be fully passed on to customers."

As much as 25 per cent of the country's total mortgage volume will be affected by the buffer, Swiss Finance Minister Eveline Widmer-Schlumpf said at a briefing in Bern. "We want to counter pre-emptively the possibly difficult consequences of a bubble," she said. "If the situation stabilises, we can abolish it the same way we introduced it."

The average asking price for a single-family home in Switzerland has advanced 26 per cent since the end of 2006, according to an index published by property consultant Wueest & Partner. In Zurich, home to companies including bank UBS and insurer Swiss Re, they've risen 36 per cent in that period, while the region around Lake Geneva reported a 55 per cent increase.

The UBS Swiss Real Estate Bubble Index remained in the so- called risk zone for a second quarter in the three months to the end of December, according to an indicator published on February 4. Zurich and Geneva along with Lausanne, in the country's French-speaking part, are the most at risk of a bubble, according to UBS.

The government's new rules won't have much of an impact, said Bruno Birrer, chief operating officer at Peach Property Group, a luxury-home developer in Zurich. "The market is really strong," he said. "From time to time, you'll have somebody saying there's a bubble coming but, as always, we have a strong and solid economy here, so we're not afraid about that."

The direct influence of the buffer on mortgage rates may be low, with costs increasing less than 0.1 per cent, said UBS economists Matthias Holzhey and Fabio Trussardi. What's more important is that the measure "sends a signal," they said. "Risk sensitivity, and as a result, the risk premiums are likely to increase."

"This is a first step, giving the SNB the opportunity to expand the buffer should it consider it necessary," said Alexander Koch, an economist at UniCredit in Munich.

UBS and Credit Suisse, Switzerland's two largest banks, had combined outstanding mortgages of 252.2 billion francs at the end of November.