Swiss housing market hot, but will it boil over?
Kuesnacht, Switzerland |
Kuesnacht, Switzerland (Reuters) - On the "Gold Coast" of Lake Zurich, modern glass and concrete apartment blocks with private speedboat docks crowd the waterfront. Some seem awkwardly large for their lots, as though muscling in on the belle époque villas next door.
These new buildings symbolize a housing boom that is giving Swiss authorities a headache as they battle to keep a lid on the franc currency, which rose sharply in value last year as investors sought shelter from the euro zone debt crisis.
With the Swiss National Bank unable to lift the ultra-low interest rates that have helped fuel rising house prices without risking a fresh franc surge, the Swiss are betting on new regulation to let some air out of the market.
But that may not be enough to prevent further inflation in property prices.
In Kuesnacht, site of the Gold Coast, a scarcity of land means even modest, outdated homes can now cost several million francs (dollars). Developers typically tear down the existing properties, replacing them with luxury flats.
"There's definitely the danger of a real estate bubble," said Rudolf Minsch, chief economist of business lobby economiesuisse. "There are some signs we're in a state of overheating."
According to data from the SNB, prices for owner-occupied apartments and houses have risen by around 20 percent since the financial crisis erupted in 2008. The number of permits for building issued in Swiss towns and cities meanwhile rose 13.5 percent on the year in the first quarter of 2012.
Real estate stocks have also rocketed, with property investment firms such as Swiss Prime Site SPSN.S and PSP Swiss Property (PSPN.S), outperforming the wider market .SSHI this year.
HISTORY TO REPEAT?
Switzerland last tightened lending standards a decade ago after suffering a housing market collapse in the 1990s that forced the closure of a bank and dented growth.
Between 1988 and 1992, Swiss house and flat prices rose about 10 percent as the central bank loosened policy in response to the 1987 stock market crash, while credit growth exploded by more than 40 percent.
Switzerland's current property price rises pale in comparison to eye-popping increases of over 100 percent in Spain and 300 percent in Ireland before the 2008 crash.
Yet by the standards of Switzerland, where a variety of regulatory measures curb speculative investment, and which prides itself on stability and predictability, the current increase in prices and credit growth is unusually strong.
According to the SNB, household loan growth has risen about 20 percent from four years ago and competition among mortgage lenders is fierce. Mortgage loans by banks are now equivalent to 130 percent of gross domestic product, up about 10 percentage points from a decade ago, according to a calculation by Die Volkswirtschaft, a publication of the economy ministry.
Swiss financial regulator FINMA warned earlier this year that banks were increasingly granting exceptions and giving loans to people who would not previously have qualified for them.
Evidence that credit quality is deteriorating has also prompted calls for caution from the Organisation for Economic Co-operation and Development and the global Financial Stability Board, which said a pile up of dud mortgages could threaten the stability of the financial system.
Last month, ratings agency Standard & Poors downgraded its outlook on nine Swiss banks with big mortgage books, among them Basler Kantonalbank (BSKP.S) and Zuercher Kantonalbank ZKB.UL, citing real estate market imbalances.
Responding to these danger signals, FINMA and the government brought new regulations into force from July 1 that incorporate best practice guidelines set out by the Swiss Bankers' Association, supplementing existing curbs on speculative buying.
Under the new rules, borrowers must make a 10 percent cash down payment, and are forbidden to finance the purchase entirely with their statutory retirement savings. Mortgages must also be steadily paid down to two-thirds of the principal's value over two decades, with no leniency granted in expectation that property prices will rise.
Banks found not to have adhered to the new requirements will have to boost their capital to offset the higher risk. The SNB will also be able, with the government, to trigger an additional capital buffer to safeguard against mortgage book risks.
How effective these measures will be remains to be seen.
"It's too early to say. Only the new loans are affected," said FINMA spokesman Tobias Lux. "But we can say, based on feedback we're getting, that banks are taking it seriously."
IMMIGRATION A SUPPORT
Despite a deep recession following the start of the financial crisis, the cost of bailing out flagship bank UBS (UBSN.VX) and the risks posed to growth by the strong franc, the Swiss economy remains in robust shape compared to many peers. Unemployment is below 4 percent, with government debt equivalent only to about 40 percent of annual output.
Switzerland's low corporate and income taxes and limited bureaucracy have led many to firms choose the country as their base, and immigration - chiefly of highly skilled workers from neighboring European Union countries - is high.
The statistics office has said Switzerland's population will breach the 8 million mark for the first time this summer.
"Switzerland's attractiveness as a place to do business has only risen of late," eonomiesuisse's Minsch said.
Immigration is a driver of demand for property and has helped push the average price of a Swiss home to more than 800,000 Swiss francs, according to consultancy Wuest & Partner, although the country-wide rise in prices of around 5 percent over the last year shown by its data far outweighs immigration growth of 1 percent.
Credit Suisse real estate analyst Thomas Rieder said the approval by voters earlier this year of a measure that will limit construction of new holiday homes in popular ski resorts such as Davos and Zermatt should support prices in such towns.
Buying houses as an investment rather than to live in remains rare, however, and Swiss home ownership is low compared with other countries - about 40 percent, according to Die Volkswirtschaft, much less than in France, Italy or Britain.
Property purchases by non-resident foreigners are tightly restricted by law, while the way in which property is taxed creates an incentive to hold onto real estate. In some areas, for example, people offloading property after just 12 months are penalized with a capital gains tax of 50 percent.
"It's the case that around Zurich and Lake Geneva we do have very high valuations. But so far we're not seeing the speculative component," said Credit Suisse real estate analyst Thomas Rieder. "Factors for this are the historic low interest rates and the level of immigration."
There are signs already that the heat may already be coming out of the market, with the UBS real estate index, which earlier this year looked poised to cross into the "risk" zone, inching away from it in the second quarter.
But it may still be too early to sound the all-clear.
(Reporting by Catherine Bosley; additional reporting by Paul Day and Nigel Davies in Madrid, Lorraine Turner in Dublin; Editing by Catherine Evans)
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