Alarm sounded as threat of a Swiss housing market bubble grows

Experts fear that strong housing market is at risk of overheating amid spiralling private debt

PUBLISHED : Wednesday, 13 November, 2013, 4:01am
UPDATED : Wednesday, 13 November, 2013, 4:01am

Risks to the Swiss property sector grew more severe in the third quarter, a sign authorities may consider further steps to prevent an overheating of the housing market.

The UBS Swiss Real Estate Bubble Index rose to 1.20 points in the third quarter from a revised 1.15 points in the second, according to a statement from UBS.

A reading above 2 would indicate a bubble.

Switzerland's housing market is experiencing the strongest rise in two decades, with the central bank's loose monetary policy keeping the cost of taking out a mortgage low.

The benchmark interest rate of the Zurich-based Swiss National Bank (SNB) has been at zero since August 2011. The rate of credit growth is outpacing that of the economy, and the ratio of private debt, primarily mortgage loans, now stands at a record 170 per cent of annual output, according to the SNB.

"Although economic growth in the last quarter was higher than in the previous quarter, it was unable to keep pace with the price and debt momentum on the residential real estate market," said Matthias Holzhey and Claudio Saputelli, of UBS.

The SNB has sounded the alarm about the property market overheating in a bid to prevent a repeat of the real estate crisis of the 1990s, which stunted economic growth for years. It was behind the introduction of a capital buffer for banks in February.

The buffer of additional capital, which banks have had to comply with since September 30, is currently set at 1 per cent of risk-weighted assets tied to residential mortgages to guard against losses on loans. At the behest of the SNB, the government can raise it by up to 2.5 per cent.

According to UBS, the index's increase in the third quarter was driven by an annual 4.2 per cent jump in house prices.

The Swiss economy will grow 1.5 per cent to 2 per cent this year, the central bank predicts.

Housing prices rose faster than household incomes in the third quarter.

The cost of a mid-priced house was 6.1 times annual household income, UBS said, above the long-term average of 5.2 annual incomes.