Real estate bubble index: owner-occupied home market with unchanged risks
The UBS Swiss Real Estate Bubble Index stood in the risk zone at 1.35 points after a slight increase in the final quarter of 2016. The further increase in the ratio of purchase prices to rents and income reflects increasing interest rate risks. The stabilization of the Real Estate Bubble Index in the last few quarters is due to the sharp slowdown in household debt growth.
Zurich, 3 February 2017 – The UBS Swiss Real Estate Bubble Index stayed in the risk zone in 4Q 2016 at 1.35 index points. The index increased only marginally over the slightly revised figure for the previous quarter. The sub-indicators price-to-earnings and price-to-rent increased slightly. On the other hand, the slower growth in mortgage debt had a dampening effect.
Interest rate risks continue to rise
In the meanwhile, the index has been moving in the range of 1.30 to 1.45 index points for one and a half years. The disparities in the owner-occupied housing market have thus stabilized, but have not lessened. As such, the dependence of owner-occupied housing prices on low interest rates has risen further in recent quarters. The buy-to-rent ratio increased for the ninth consecutive quarter, as the average home ownership overheads in Switzerland have been lower than the cost of renting comparable properties since mid-2014. However, if the mortgage rate increases by one percentage point, the costs of an owner-occupied home would again exceed those of a comparable rented apartment, which could trigger a price correction on the owner-occupied housing market.
Debt only driven by new buildings
By contrast, the volume of outstanding household mortgages rose by only 2.6% compared to the previous year. Although this is the lowest value since December 1999, the mortgage volumes are still rising faster than the disposable income of Swiss households. In general, the growth of the mortgage volume is determined by the construction of new apartments, the remortgaging of the housing stock and the amount of the amortization payments. The increase in household debt by CHF 18 billion in 2016 is due entirely to lending for new buildings according to UBS calculations. In the past year, amortization payments are likely to have been higher than the additional lending for the housing stock.
Price corrections shift regional risks
The number of risk regions remained unchanged in 4Q 2016. The Geneva, Nyon and Morges regions are in a correction phase. Local owner-occupied housing markets have already cooled down in these regions. In the past three years, price corrections in the Valais, the Bernese Oberland and parts of Graubünden have led to no tourist regions being on the risk map anymore. The regional risk focus is gradually shifting from Lake Geneva to the regions of Zurich and Central Switzerland.
UBS Swiss Real Estate Bubble Index – 4Q/2016
Selecting exposed regions
The regional risk map shows those regions posing the greatest macroeconomic risks in the event of a Swiss-wide correction. The analysis is based on the population size, the price level and the price behavior for owner-occupied homes. The selection of risk regions is linked to the UBS Swiss Real Estate Bubble Index. Vacancy or liquidity risks are not taken into account.
Regional risk map – 4Q/2016
UBS Switzerland AG
Claudio Saputelli, Head Swiss & Global Real Estate, Chief Investment Office WM
Phone +41-79-513 50 45
Dr. Matthias Holzhey, Head Swiss Real Estate Investments, Chief Investment Office WM
Phone +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 index is published on a quarterly basis. The next date of publication for the UBS Swiss Real Estate Bubble Index is 5 May 2017.