UBS Real Estate Bubble Index: market cooling off but not reversing

The UBS Swiss Real Estate Bubble Index declined for the first time in four years in the second quarter of 2012 and now stands at 0.82 index points. While this 0.13-point decline indicates a slightly cooler market, it is not a sign of a trend reversal.

The UBS Swiss Real Estate Bubble Index currently stands at 0.82. This represents a surprising decline of 0.13 index points compared to the previous quarter. While the real estate market is still clearly booming, the decline indicates that the market has cooled off slightly. 

A drop in asking prices – down 1.6 percent for condominiums and 0.5 percent for single-family homes compared to the previous quarter – combined with a rise in incomes and stagnation in consumer prices have for the time being stopped the UBS Swiss Real Estate Bubble Index from continuing on its partially strong upward trajectory of recent quarters. Demand for investment properties also seems to have stabilized at a high level.

Given Switzerland’s historically favorable financing terms, high population growth and robust domestic economy, the decline in the Real Estate Bubble Index should not mark the beginning of a turnaround in the Swiss real estate market. The minimum requirements for mortgage financing instituted on 1 July 2012, (at least 10 percent of equity not taken from retirement savings, plus the obligation to pay off loans so they amount to no more than 2/3 of the property’s lending value within 20 years) may curb demand for residential property and slow down price growth rates somewhat in upcoming quarters.

Prices continued to rise strongly in the exposed regions, i.e. regions with a substantial risk of a home price correction. The Zurich region clearly leads the way with growth averaging nearly nine percent over the last three years.  The number of exposed regions has, however, dropped again due to the index decline in the second quarter of 2012. Though the regions of Unteres Baselbiet and Saanen-Obersimmenthal are no longer considered exposed regions, they are still monitoring regions.

Method
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 is comprised of 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.

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.

The number of risk regions declined in the second quarter 2012. Though the regions of Unteres Baselbiet and Saanen-Obersimmenthal are no longer considered exposed regions, they are still monitoring regions. This adjustment was made to reflect new price data and the decline in the UBS Swiss Real Estate Bubble Index. Furthermore, the population mobility regions of Zurich, Geneva and Lausanne remain Switzerland's riskiest due to their national importance. Other exposed regions include the large metropolitan areas of Zug, Pfannenstiel, Zimmerberg, March, Vevey, Morges and Nyon as well as the tourist regions of Davos and Oberengadin. The monitoring region category includes Basel-Stadt, Unteres Baselbiet, Knonaueramt and the Glattal-Furttal region.

UBS AG

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 November 5, 2012.