Real Estate Bubble Index continues to indicate increased potential for correction
The UBS Swiss Real Estate Bubble Index has risen slightly to 1.23. Despite a decline in growth rates for prices and mortgage volume, the potential for correction has increased further. On a regional basis, additional regulatory measures could result in exacerbation of the imbalances.
Zurich/Basel, 5 February 2014 – The UBS Swiss Real Estate Bubble Index has risen slightly to 1.23 index points following a small 0.03-point gain. As a result, the magnitude of any drop and the risk of a correction have again grown slightly. The rise was driven primarily by price growth in residential property, running at a 3.6% rate year on year in real terms. The index performance nevertheless confirms the gradual cooling of the housing market, as reflected in prices and mortgage demand.
However, a major price correction is not necessary for a noticeable calming of the market. A price drop of just 5% would push the UBS Swiss Real Estate Bubble Index to a level below 1, out of the risk zone. A halving of mortgage growth in the current year to less than 2% would have a similar effect.
The flattening of price performance seen throughout Switzerland was primarily influenced by slightly falling or stagnating prices in the hotspots on Lake Geneva and Lake Zurich, while prices in Eastern Switzerland, for example, continued to rise strongly. The migration of the local population from high-price regions into extended agglomerations and peripheral locations has thus had a dampening effect on prices in the regions with the highest valuations.
Regulatory measures to reduce risks on the real estate market, such as the anti-cyclical capital buffer, are unable to take into account differing phases of the price cycle on a regional basis. More stringent lending criteria could result in a credit squeeze, for example. This would trigger an exaggerated drop in prices in markets already undergoing a correction. On the other hand, an undesirable side effect of any tighter restrictions on the lending limit could cause a shift in demand to lower-cost regions, for example, which would in turn tend to intensify imbalances in those areas.
The Martigny economic region is now one of the risk regions due to the accelerating price growth it has enjoyed in the last three years. In contrast, the Saanen-Obersimmental and Unteres Baselbiet regions have seen a slowdown in the market. Due to their high valuations, however, these regions remain in the list of monitored regions.
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 - 4Q 2013
Claudio Saputelli, Head of CIO WM Swiss & Global Real Estate Research
Tel. +41 79 513 50 45
Dr. Matthias Holzhey, Economist CIO WM Swiss & Global Real Estate Research
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 May 2014.