Zurich/Basel, 3 February 2015 – The UBS Swiss Real Estate Bubble Index remained practically unchanged, staying in the risk zone at 1.28 points in the fourth quarter of 2014. The index shed a marginal 0.01 points compared to the previous quarter. Slower growth in owner-occupied home prices (1.2% year-on-year) and the leveling off of outstanding mortgage volumes (3.3% year-on-year) signals a slow-down on the market for owner-occupied homes. UBS CIO WM did, however, observe an increase in investment demand for owner-occupied homes. For example, UBS saw a significant increase in the number of mortgage loan applications for properties not intended for self-occupancy, reaching an all-time high.

Interest rates send contradictory signals

Negative interest rates and falling consumer prices will be facts of life in Switzerland for the foreseeable future. Mortgage rates, which continue to be low, seem likely to make owner-occupied home purchases more appealing and residential rental property purchases will become more attractive because of the negative nominal interest rates. After all, amid the investment shortage, these kinds of speculative purchases are one of the few options left for earning returns on safe assets on the Swiss market. At the same time, however, negative inflation will increase the real value of debt. Negative nominal interest rates for safe Swiss investments are also likely to raise incentives to pay back existing mortgages, which should slow down the growth of debts for private households.

Real estate investments less predictable

On balance, negative interest rates should not significantly exacerbate the imbalances in the Swiss market for owner-occupied homes. UBS CIO WM does, however, expect prices to fall slightly in the current year. Economic developments pose the greatest uncertainty: if the economy teeters toward recession and unemployment rises significantly, the current overvaluation will likely be corrected. The lower interest rates may grant a grace period here. But the Swiss National Bank’s abandonment of the Swiss franc's exchange rate floor has brutally demonstrated how abruptly artificial imbalances can be unwound.

UBS Swiss Real Estate Bubble Index – 4Q 2014 

Methodology
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 monitored 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 2014

UBS AG

 

Contacts

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 May 2015.

www.ubs.com