No sign of relief, despite stagnating UBS Swiss Real Estate Bubble Index
UBS Swiss Real Estate Bubble Index stands at 1.22 after a slight decline. Although the imbalances have not intensified further, the slight fall in prices on the residential real estate market has, for the time being, failed to bring about a significant reduction in the macroeconomic risks and the existing correction potential.
Zurich/Basel, 5 May 2014 – The UBS Swiss Real Estate Bubble Index remained practically unchanged, staying in the risk zone in the first quarter of 2014 at 1.22 points. The index fell minimally by 0.01 points from the previous quarter. The Real Estate Bubble Index therefore confirms the slowdown that has been felt on the transaction market for several quarters now. However, from a valuation perspective, caution is still advised.
The stagnation of the UBS Swiss Real Estate Bubble Index can be attributed to the overall slight decline in owner-occupied real estate prices. The prices of single-family homes in particular, registered the largest quarterly fall in 17 years with an annualized drop of 4%. Slowly but surely, the prices appear to be reaching their limit, as many first-time buyers struggle to comply with the financial sustainability norms. In addition, the growing saturation of real estate in individual urban areas and increasingly restrictive credit policies due to the newly introduced regulatory measures are pushing prices down. The additional tightening of self-regulation (higher repayment rates, stricter mortgage rules) currently being discussed, and the uncertainty about immigration due to the mass immigration initiative adopted, could initiate a turnaround in price behavior.
For the time being the correction potential of the residential real estate market and the risks for the Swiss economy remains high. Although the rise in mortgage volume has slowed somewhat in the first quarter of 2014, the level of debt is still growing too quickly relative to the stagnating household income. The record number of loan applications for real estate not intended for owner occupancy also continues to be grounds for caution.
The regional risks have hardly changed at all. We did observe a worsening of the imbalances in the monitored regions of Lugano and Locarno in Ticino, with price increases of around 5% in an annual comparison, as well as in some parts of Central Switzerland and Thurgau. In the Lake Geneva region prices remained under pressure. However, due to the high valuation, correction potential continues to be high. On the regional risk map, Basel City is now classified as a risk area and the Gros-de-Vaud region is now considered a part of the regions being monitored.
Depending on its current value, the index falls into one of the following risk categories: slump, balance, boom, risk and bubble. These categories are specifically defined and ranked in order of risk. The UBS Swiss Real Estate Bubble Index comprises six sub-indices that track: the relationship between purchase and rental prices, the relationship between house prices and household income, the development of house prices relative to inflation, the relationship between mortgage debt and income, the relationship between construction and gross domestic product (GDP), and the ratio of loan applications filed for intended rental properties to total loan applications filed by UBS private clients.
Selecting exposed and monitoring regions
Our selection of exposed regions is tied to the level of the UBS Swiss Real Estate Bubble Index and is based on a multi-level selection process utilizing regional population and property price data.
Regional risk map – 1Q 2014
Claudio Saputelli, Head of CIO WM Swiss & Global Real Estate
Tel. +41 79 513 50 45
Dr. Matthias Holzhey, Economist CIO WM Swiss & Global Real Estate
Tel. +41 44 234 71 25
The UBS Swiss Real Estate Bubble Index report is available on the Internet via this link: www.ubs.com/swissrealestatebubbleindex-en.
The next date of publication for the UBS Swiss Real Estate Bubble Index is 5 August 2014.
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