Swiss government sound alarm on property bubble threat
Property prices have surged in Switzerland as rock-bottom interest rates have stimulated massive lending by banks and increased borrowing by hopeful homeowners. Average prices of single-family houses and privately owned apartments have risen by more than 80% over the past 15 years, according to the Swiss National Bank, which estimates the market is overvalued by around 30%.
Swiss banks must cushion themselves against home lending risks, the government said on Wednesday, sounding the alarm over one of Europe's most expensive housing markets where total mortgage lending has swollen to more than $1 trillion. Property prices have surged in Switzerland as rock-bottom interest rates have stimulated massive lending by banks and increased borrowing by hopeful homeowners.
Average prices of single-family houses and privately owned apartments have risen by more than 80% over the past 15 years, according to the Swiss National Bank, which estimates the market is overvalued by around 30%. Prices increased by nearly 6% during the third quarter of 2021 compared to the previous year, according to UBS, the largest increase since 2013.
"Since the momentum of household income failed to keep pace with prices, the affordability of residential property deteriorated," UBS said, saying overheating risks were highest in Zurich, Basel, Geneva and Lausanne. Overall mortgage lending has exploded to more than 1 trillion Swiss francs ($1.09 trillion), causing concerns at the Swiss National Bank about the fallout for the economy and banks if interest rate rises made debt repayments unsustainable.
Switzerland experienced its last property bubble and collapse in the 1990s, when house prices collapsed after rising strongly during the late 1980s. The government agreed on Wednesday to the central bank's proposal to reactivate the countercyclical capital buffer, which was designed to strengthen banks by increasing their ability to absorb losses.
'STRENGTHENS RESILIENCE' Lenders will from the end of September have to hold additional capital amounting to 2.5% of their risk-weighted positions that are directly or indirectly backed by residential real estate in Switzerland.
"The countercyclical capital buffer strengthens banking sector resilience in the event of corrections resulting from imbalances on the mortgage and real estate markets," the government said. "At the same time, it helps to prevent the situation on these markets from deteriorating further."
UBS declined to comment, while Zuercher Kantonalbank did not immediately respond to a request for comment. Concerns about potential property bubbles have risen this year. The European Central Bank has warned that banking regulators could be forced to put curbs on lending and cool a market that has been growing rapidly despite a pandemic-induced recession.
Germany this month asked its banks to set aside around 22 billion euros ($24.81 billion) of extra capital to offset growing property bubble risks in a market which is now 10% to 30% over-valued.. The median price for a house in Zurich has risen to 2.6 million francs. Singer Tina Turner and her husband just bought a lakefront mansion worth around 70 million francs, a newspaper reported.
The buffer, which previously stood at 2%, was removed at the onset of the coronavirus pandemic to give banks the maximum leeway to lend to companies with cash flow problems during the crisis. But the SNB said the reasons for the deactivation no longer existed, with no signs of companies experiencing a credit tightening. ($1 = 0.8867 euros) ($1 = 0.9204 Swiss francs)
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