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Real Estate Bubble Index: slight decrease in imbalances
The UBS Swiss Real Estate Bubble Index declined somewhat in the third quarter of 2017 and is currently in the risk zone at 1.38 index points. A slight fall in prices and a lower increase in mortgage volumes than in the previous quarter reduced imbalances. The demand for buy-to-let investments saw a marginal drop, but is at a level that is not sustainable in the long term.
Zurich, 3 November 2017 – The UBS Swiss Real Estate Bubble Index fell slightly in the third quarter of 2017 and is currently in the risk zone at 1.38 index points. The revised value of the previous quarter is 1.41 index points. The decline in the Real Estate Bubble Index is due to several factors: First, the price of owner-occupied homes fell slightly; second, the growth in mortgage debt was again weaker than in the previous quarters; and third, the demand for buy-to-let investments declined somewhat.
However, weak economic growth and falling rents prevented a more considerable decrease in the imbalances in the housing market. On the one hand, the ratio of purchase prices to household income stagnated, and on the other hand, the gap between purchase and rental prices increased further.
Buy-to-let as a macroeconomic risk
Condominiums for investment purposes still represent a significant proportion of all acquisitions. The proportion of loan applications relating to properties intended for let has fluctuated between 18 and 20 percent since the end of 2012. This contributes to the existing imbalances in the housing market. An economic crisis or a large increase in interest rates is likely to affect this part of the market considerably more than the owner-occupied segment. The low net returns of two to three percent offer hardly any buffer against increasing interest rates, vacancy or falling rents. Investors with low diversification are highly likely to suffer significant wealth outflows in a crisis. In addition, a buy-to-let property is more quickly sold than an owner-occupied home if a household gets into financial difficulties. In summary, this can increase offers in the market in a correction phase and thus increase price pressure.
Demand for residential property remains dynamic
Condominium prices fell for the first time since the start of the real estate boom in the year 2000. Adjusted for inflation, properties saw a price drop of 1.4 percent in comparison to the same quarter of the previous year. However, UBS Chief Investment Office Wealth Management expects an upbeat end to the year and is not anticipating further price falls in the current quarter. Generally, next year should see an acceleration in economic and thus also income growth. Moreover, long-term interest rates are expected to rise very little before the end of 2018, meaning that demand for residential property – both for own use and for investment purposes – should remain strong.
UBS Swiss Real Estate Bubble Index - 3Q/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 – 3Q/2017
Risk regions for the Swiss residential property market and regions with a price correction of more than 5 percent since 2014
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 7 February 2018.