Swiss effort to cool housing market faces test from Fed delay
ZURICH Oct 1 (Reuters) - Switzerland on Tuesday forced banks to hold more capital to try to cool its booming housing market, a measure that will be put to the test as the Federal Reserve's stimulus keeps upward pressure on asset prices.
The Swiss National Bank wants to tame its real estate market without resorting to interest rate increases. Higher rates would clash with its aim to cap the Swiss franc at 1.20 per euro, a policy introduced two years ago to dim the appeal of the safe-haven currency and prevent a recession.
Switzerland hopes its counter-cyclical capital buffer will curb real estate prices and home mortgage loans that have jumped on average by 20 percent since 2008, outpacing the rest of Europe. Price gains in and around cities like Geneva and Zurich have been even stronger.
"The longer interest rates stay low, the stronger the pressure to use additional measures, even if much less effective, such as the buffer," said Manuel Ammann, finance professor at the University of St. Gallen.
"Had these been ordinary times, the SNB would have increased interest rates long ago," he added.
Switzerland announced in February that banks would be required to hold extra equity capital of 1 percent of the risk-weighted assets in their mortgage portfolio before Oct. 1 to dampen activity in the real estate market.
The move made Switzerland the first country to activate a counter-cyclical capital buffer for banks' domestic mortgages, something policymakers in other countries are also looking at as a way of heading off property market booms and busts.
The Fed's decision in September to continue buying bonds at an $85 billion monthly pace may have given some slack to a liquidity tug-of-war between the Fed and the ECB. But in Switzerland, which does not share the euro zone's liquidity problems, the decision has posed problems.
Ultra-low interest rates, along with immigration and Switzerland's appeal as a safe haven for financial investors, has helped drive up mortgage lending.
Marching out of step with the ECB and the Fed to raise rates would put upward pressure on the Swiss franc, something the SNB has been battling since September 2011 when it imposed a lid on the currency, swelling its foreign currency reserves in the process.
"The SNB's hands are tied, it will have to keep the exchange rate against the euro at the level it set, but it has had to sacrifice its interest rate targets," said Fredy Hasenmaile, a real estate expert at Credit Suisse.
"It cannot move now on this point, and this is fuelling real estate."
Fixed mortgage rates have increased in recent months, providers have reported, since the Fed signalled it was considering tapering its stimulus program.
"The interest rate increase we have seen so far this year has had a much bigger effect on the housing market than the buffer," said Hasenmaile.
The rise in fixed rates, together with the capital buffer and self-regulation by the banking industry to tighten lending policies, has taken some of the heat out of the real estate market but has yet to pluck it out of risky territory.
The Swiss Bankers Association has played down signs of overheating, saying this is only present in certain "hotspots".
However the central bank remains concerned and warned only last month there was a danger imbalances on the domestic mortgage and real estate markets could increase.
This chimes with the findings of a UBS housing index, which showed the risk of a speculative housing bubble eased in the second quarter, but mortgage lending rose and real estate remained overpriced.
"In the absence of a sustained phase of weakness, the risk of a price bubble is likely to increase again in coming quarters," the authors of the study said.
Swiss law allows for the buffer to be increased to up to 2.5 percent, but analysts say the SNB will likely hold back before asking the government to increase the buffer.
"As certain areas of the market are showing signs of cooling off, they might adopt a wait-and-see policy before they move ahead with tighter regulation," Hasenmaile said. (Additional reporting by Rupert Pretterklieber and Albert Schmieder; Editing by Christina Fincher)
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