Is the great real estate bubble looming over Switzerland?
09.06.2011 
The Swiss residential real estate market is booming. But it is not in a bubble, according to a recently launched index from UBS. Still, there are risk regions, especially in Lake Zurich and Lake Geneva.
The major bank reported that currently, the risks of a real estate bubble are highest in the Zurich, Geneva and Lausanne regions, according to this report. It indicates that greater risks also exist in the agglomeration regions of Zug and Lake Zurich in the Pfannenstiel, March and Zimmerberg regions, as well as Vevey and Nyon in Lake Geneva.
The bank experts also listed Davos, where real estate prices have likewise risen sharply. The real estate markets in Limmat Valley, Morges and the Upper Engadin will be put under special observation in the near term. In several regions, residential real estate prices reportedly more than doubled within one decade.
Nationally, the UBS "Swiss Real Estate Bubble Index" reached a value of o.63 points. This indicates a "boom" at that level. While this phase admittedly exceeds the "low" and "balanced" ratings, it is still below "at risk" and "bubble."
Six components
The UBS index consists of six components: The ratio of purchase prices to lease rates; the ratio of housing prices to household income; the progression of housing prices to inflation; the ratio of mortgage debt to income; ratio of construction activity to gross domestic product; the volume of loan applications from bank customers for residential investment properties.
UBS classifies a market at an index level above a "1.00" as "at risk." Calculated retroactively to 1982, the index reached a peak level of 2.5 points at the beginning of the 1990s, at the high point of the last Swiss real estate bubble. Back then, the abundant issuance of mortgage loans pushed several regional banks to the brink. The collapse of SLT (Spar- und Leihkasse Thun) made international headlines, as customers in front of closed offices sought in vain to withdraw their savings.
Exercise caution
The UBS bank experts believe caution is warranted, given the sharp price increases for owner-occupied homes in Switzerland. Real estate bubbles represent a substantial risk to national economies, as the USA, Spain, Ireland and other nations recently had to experience. The Swiss real estate market has been driven by years of extremely low interest rates and the population growth resulting from the freedom of movement of persons with the EU.
The Swiss National Bank (SNB) has already warned of a bubble several times. It is meticulously tracking bank issuing practices to ensure that mortgage loans are not granted to customers who would be unable to pay their installments were interest rates to rise.
Ever since the financial crisis, the SNB's prime rate has been at a record low. Normalization of monetary policy has been a long time coming: Many economists do not anticipate the SNB first raising the prime rate in June again. Because doing so may further inflate an already overinflated Swiss franc, which, at record prices against the euro and US dollar, would further encumber the internationally-oriented Swiss economy.
Source: Tages Anzeiger, May 31, 2011
Posted by: 
Claude Ginesta
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