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Slight increase of the real estate bubble index
The UBS Swiss Real Estate Bubble Index remained in the risk zone at 1.39
points in the first quarter of 2017 following a moderate increase. The increase in home prices outpaced the increase in rents and income. Demand for buy-to-let investments also rose, in spite of heightened market risks.
Zurich, 5 May 2017 – The UBS Swiss Real Estate Bubble Index remained in the risk zone in Q1 2017 at 1.39 index points. The index increased moderately over the slightly revised figure for the previous quarter. The rise was driven mainly by a slight acceleration in nominal price increases for owner-occupied homes amid stagnant rents and income. Demand for buy-to-let investments rose as well.
Buy-rent ratio deteriorates further
Stagnant rents caused the buy-rent ratio to deteriorate for the tenth time in a row in Q1 2017. At the same time, the percentage of loan applications received by UBS for properties not intended for personal use experienced another slight increase. This can be explained by the fact that buy-to-let investments can produce high returns on equity if they are highly leveraged.
Given the continued large number of building permits, it seems likely that construction activity will remain (too) strong in this current year. We estimate that the construction of new apartments will exceed the additional demand for apartments by approximately five to ten thousand units this year. This should keep rents on a downward trajectory, particularly for new apartments. In other words, life is about to get even more difficult for landlords. Investor demand for owner-occupied homes is primarily attributable to the entrenched expectation that interest rates will remain low. However, a rate increase would most likely bring strong demand for buy-to-let investments to an abrupt halt.
Reduction of imbalances on the horizon
The performance of the real estate bubble index was hampered somewhat by a higher inflation rate. The quarter-on-quarter increase of 0.6 percent in consumer prices was only a one-time effect, though. UBS Chief Investment Office Wealth Management expects the inflation rate to average just 0.4 percent for the whole year. Nevertheless, the imbalances in the owner-occupied housing market should abate somewhat by year-end. Current leading indicators point to an acceleration in economic growth while owner-occupied home prices are expected to flatten out by the end of the year.
UBS Swiss Real Estate Bubble Index – 1Q/2017
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 – 1Q/2017
Risk regions for the Swiss residential property market and regions with a price correction of more than 5 percent since 2013
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 8 August 2017.