January 28, 2013 5:04 pm

Swiss fear housing market correction

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Last summer, Switzerland became the first major financial centre to introduce rules that would force banks to build up their capital reserves should parts of the economy start growing too fast.

With the Alpine state’s housing market in overdrive, speculation is growing that it could also become the first to implement them.

“We don’t have a bubble in the way that Spain or Ireland did, with double digit price increases year after year. But we have had a boom for 15 years, and at some point things become unsustainable and you get a correction,” says Claudio Saputelli, an economist at UBS.

The average price of an owner-occupied apartment in Switzerland has risen 75 per cent in the past decade, according to property consultants Wüest & Partner, fuelled by a combination of high immigration and, latterly, the rock-bottom interest rates to which the Swiss National Bank has committed itself in a bid to stem the appreciation of the franc. Mortgage volumes, meanwhile, are higher than Swiss national output.

In November, the Swiss real estate bubble index compiled by UBS entered its “risk zone” for the first time since the housing crash that hit Switzerland at the end of the 1980s. That is still one notch below what UBS calls an outright bubble, but in sought-after parts of central and western Switzerland the market is already showing more pronounced signs of overheating.

“In the danger zones – such as around Lake Zurich and around Lake Geneva – we already have bubble conditions,” says Mr Saputelli. “If the extraordinary growth rates that we are seeing there are not stopped, then there will be a big correction. And 25 per cent of the Swiss population lives in these areas.”

Under Switzerland’s new rules, the SNB can address such threats by asking the government to force lenders to build up capital buffers worth up to 2.5 per cent of their risk-weighted assets, and economists increasingly believe such a request could be in the offing.

“If the market developed as quickly in the fourth quarter as it did in the third, then I would expect [the SNB] to ask the Bundesrat [federal council] to introduce the capital buffers,” says Mr Saputelli.

Risky territory

Other observers take a similar line. “I think a lot of people in the mortgage market are quite nervous about it – they expect to hear every week that the buffers will be introduced,” says Fredy Hasenmaile, head of real estate research at Credit Suisse.

“I think as soon as [the SNB] gets an indication that the government would back their proposal, they would apply immediately,” he adds.

After receiving its new powers last July, the SNB said it would not act until the impact of other market-calming rules introduced last summer became clearer. However, the central bank stressed that its patience should not be interpreted as an “all clear”. Fritz Zurbrügg, one of the three main members of the SNB’s governing board, conceded earlier this month that the market had not developed as hoped. “We are worried,” he told Swiss television.

He also ruled out addressing the problem by raising interest rates, as this would undermine the SNB’s fight against the overvaluation of the franc.

Yet while such a stance leaves the introduction of additional capital requirements as an obvious alternative, both the efficacy and the precision of the new tool remain to be seen.

Capital buffers should help banks cope better with a future crash. But in the meantime, with interest rates close to zero and Switzerland’s mortgage market very competitive, they are unlikely to make credit expensive enough to slow mortgage demand significantly.

Economists also fret that such “macroprudential” rules often have unwanted side-effects. While Switzerland’s big banks should be able to take tougher rules in their stride, says Robert Weinert of Wüest & Partner, smaller banks may struggle.

All of which leaves the SNB in a delicate situation, argues Felix Brill, chief economist at Wellershoff & Partners, a consultancy.

“They don’t want to stop the real estate sector too abruptly – especially at a time when the Swiss economy is slowing and its main trading partners are struggling,” he says. “But they have to balance that against the dangers of not acting and being faced with bigger problems if a bubble were to burst.”

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