Switzerland: Switzerland Property Market Bubble

Swiss banks will presently have to set aside additional capital as buffer against risks stemming from surging prices in the housing market and huge mortgage deficit.

Following a conference on Wednesday, the Federal Council ordered banks to create a capital buffer equivalent to 1 % of their risk-weighted, direct or indirect mortgage-backed positions secured by residential property in Switzerland. Banks are instructed to comply by September 30.

The decision was based on a proposition from the Swiss National Bank, which had formerly voiced concerns over the property market overheating. The move is targeted only at residential mortgages and hence, will spare companies. In June last year, the government tightened the capital requirements for mortgages and announced a revision of the self-regulation rules for mortgage lending.

"The sustained increase in mortgage deficit and rise in real estate prices of residential properties has led to imbalances which pose a significant risk to the stability of the banking sector and to that of the economy," the government said in a statement today.

"These imbalances intensified further during the second half of 2012," the central bank said separately. The SNB said it will continue to closely monitor developments on the mortgage and real estate markets, and will regularly reassess the need to either adjust the level of the buffer, or deactivate it. The bank can impose a capital buffer of up to 2.5 %.

There is little the SNB can do in terms of monetary policy as interest rates are at ultra-low levels and are unlikely to move higher in the near term given an overvalued franc. The low interest rates are as well aimed at reducing the safe-haven appeal of the alpine economy amid the Eurozone sovereign deficit crisis. The central bank as well introduced a floor price of CHF 1.20 per euro in 2011.

In December, the SNB retained the currency ceiling and its key interest rate near zero, as the bank saw sluggish increase in 2013. The bank predicted increase of 1 %-1.5 % for this year. The government expects gross domestic product to grow 1.3 % this year, which is slightly weaker than the formerly projection of 1.4 % expansion.

Switzerland witnessed a housing market collapse in the early 1990s that caused trouble for homeowners inclunding banks. The UBS real estate bubble index, which is an indicator measuring the risk associated with the Swiss property market, remained in the risk zone during the fourth quarter of 2012. The 0.09 point-rise in the index to a score of 1.11 signaled growing imbalances in the real estate sector and the 'unhealthy' dependency on low interest rates.

Although the market does not from presently on show any clear characteristics of a price bubble, if the trend continues, the index may enter the bubble zone by the end of 2014, with the index exceeding 2 points, UBS statement warned.