UBS Swiss Real Estate Bubble Index still trending sideways
The UBS Swiss Real Estate Bubble Index now stands at 1.24, having increased slightly. The trend towards tighter regulatory requirements for mortgage lending is constricting prices for residential real estate and stifling the outlook.
Zurich/Basel, 5 August 2014 – The UBS Swiss Real Estate Bubble Index was practically unchanged in the risk zone, at 1.24 in the second quarter of 2014. Compared to the previous quarter, the index rose slightly by 0.02 points. The risks on the real estate market have therefore not increased significantly for a full year. This is not self-evident, since the market for real estate has been outstanding in 2014: long-term interest rates have been halved since the beginning of the year, immigration remains on the level of previous years after acceptance of the mass immigration initiative, and the economy is also doing well.
The tougher capital requirements thus far imposed on mortgage borrowers can be regarded as a success story: prices for residential real estate rose by just 2% year-on-year despite the friendly macro environment. Since about 40% of all new loans according to SNB surveys fail to comply with the 5% sustainability rules (interest costs at a rate of 5% may not exceed one third of gross salary), it becomes clear that the residential real estate market could be strongly influenced by any tightening of sustainability rules. Additional curbs on price growth rates are also likely to come from the new self-regulation rules for banks, applicable with effect from September 1, 2014 (linear amortization of mortgage debt to two-thirds of the lending value in 15 years, lower of cost or market when valuing properties, joint and several liability as a prerequisite for the recognition of a second income).
As each further measure is introduced, Switzerland is becoming more of a site for testing whether fine-tuning the real estate market can succeed based on banking sector rules for granting mortgages. The regulator's credible backdrop of threats suggests that in case of renewed acceleration of prices and debt, the regulatory screw would be tightened further. Price growth rates averaging about 5% annually throughout Switzerland, as in the boom years of 2008 to 2011, are thus likely to remain history for the time being, despite solid economic data. If macroeconomic conditions worsen contrary to expectations, however, and real estate prices fall, it remains unclear whether the regulatory hurdles could be removed again in time.
The regional risks remain unchanged. Sharp price increases of over 4% have been recorded in southern and northwest Switzerland. In the Lake Geneva region and Zurich, on the other hand, home prices remain under pressure, which given the high valuation does not indicate a positive shift.
UBS Swiss Real Estate Bubble Index – 2Q 2014
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 – 2Q 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 4 November 2014.
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