Zurich/Basel, 8 May 2015 – At 1.31 points, the UBS Swiss Real Estate Bubble Index was in the risk zone in the first quarter of 2015. It had risen a slight 0.03 points compared to the previous quarter. The rise was driven by an upswing in real home prices of 3.1 percent year-on-year and, more importantly, resurgent demand for condominiums as investment properties. Property market risks, on the other hand, were kept in check by (still) robust income growth and a relatively moderate increase in mortgage volumes.

End of price increases foreseeable

Asking prices, which have been climbing steadily, should peak in the next several quarters. The rise in vacancies in new buildings from 5 percent in 2012 to over 8 percent is a clear sign of retarded market absorption of single family homes. Gloomier growth prospects and rising unemployment over the year, both precipitated by the strong franc, will likely have an impact on income and wage growth. This will not trickle down to prices immediately, though, since asking prices tend to lag the development of market conditions. Transaction prices have not yet declined across the board, either.

Negative interest rates make it attractive to repay mortgages

UBS economists expect mortgage volume growth to slow down even further. Negative interest rates on safe haven investments such as government bonds and meager compensation for riskier investments have made debt service increasingly unattractive. Many higher-earning households will likely prefer to pay down existing mortgages instead of investing in the financial market. In addition, long-term borrowing costs for investment properties in prime locations could, in some extreme circumstances, exceed the actual net return after depreciation. Or, to put it another way, leverage could decrease the effective return on equity instead of increasing it.

Fewer exposed and monitored regions

Prices stagnated or declined in three-quarters of all Swiss economic regions in 2014. This trend has changed the risk map. Martigny has been downgraded from a risk region to a monitoring region. The Linth region and Gros-de-Vaud are no longer considered monitoring regions, due to a significant cool-down in prices.

UBS Swiss Real Estate Bubble Index – 2Q 2015

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 – 1Q 2015 


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 4 August 2015.


www.ubs.com