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UBS Real Estate Bubble Index: UBS Swiss Real Estate Bubble Index drifts ever further into the risk zone
The UBS Swiss Real Estate Bubble Index remained in the risk zone in 4Q 2012 and now stands at 1.11 index points. The rise of 0.09 points reflects a further rise in the unhealthy dependency on low interest rates.
Zurich/Basel, 4 February 2013 – The UBS Swiss Real Estate Bubble Index currently stands at 1.11 index points. This represents an increase of 0.09 index points on the previous quarter and confirms the growing imbalances in the real estate market, although the market does not yet show any clear characteristics of a price bubble. If the trend continues, however, the UBS Swiss Real Estate Bubble Index may enter the bubble zone (index lying above 2) by the end of 2014.
In 4Q 2012 the dependency of the high price level on low credit costs was further accentuated, which will determine the future market development. First, the low-cost credit distorts the cost relationship between purchase and rent, which now lies far above its long-term equilibrium rate. Second, low interest rates are still making real estate appear relatively economical in relation to income – a misconception which may cause problems for many households should interest rates rise. Third, the hunt for returns is stimulating interest in real estate as an investment object.
The latest recovery in the financial markets and the lessening propensity of investors to seek safe havens could slow down the sharp rise in real estate prices in the current quarter. The majority of the demand, however, is domestic, which means that without a significant increase in long-term interest rates, the trend is unlikely to be reversed.
Due to the rising UBS Swiss Real Estate Bubble Index, we are now including the economic regions of Appenzell Innerrhoden, Lucerne and the Prättigau Valley in the list of monitored regions. This reflects the non-sustainable price development in many tourist regions of Switzerland. However, the regions with the greatest potential for correction are still to be found around the economic hubs of Zurich and Geneva. The number of risk regions is unchanged.
UBS Swiss Real Estate Bubble Index
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.
The number of monitored regions grew in 4Q 2012, and the economic regions of Appenzell Innerrhoden, Lucerne and the Prättigau Valley will now be included among them. The increase in the UBS Swiss Real Estate Bubble Index was a crucial factor in deciding on these additions. Furthermore, the MS-regions of Zurich, Geneva and Lausanne remain among Switzerland's riskiest due to their national importance. Other exposed regions include the large metropolitan areas of Zug, Pfannenstiel, Limmattal, Zimmerberg, March, Unteres Baselbiet, Vevey, Morges and Nyon as well as the tourist regions of Davos, Saanen-Obersimmental and Oberengadin. Alongside Appenzell Innerrhoden, Lucerne and the Prättigau Valley, Nidwalden and Innerschwyz, Basel-Stadt, Knonaueramt and Glattal-Furttal all fall into the category of monitored regions.
Regional risk map: 4th quarter 2012
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 3 May 2013.