Real estate prices at risk of bubble

Construction for a terraced residential estate is underway in Wollerau, a low-tax town on the shores of Lake Zurich Keystone

Swiss property prices are rising too fast in many regions at a time when consumer prices are dropping and personal income remains stagnant, fuelling concern of a real-estate bubble, warns a report issued on Monday.

The UBS Swiss Real Estate Bubble Index shows that at the end of September real estate prices – fuelled by population growth and higher demand – entered the zone where they are at risk of a bubble for the first time since the 1990s.

The bubble index had increased 0.20 to 1.02 points from the previous quarter. The threshold for the risk zone is 1.00 and the UBS economists would speak of a bubble once it has exceeded 2.00 index points.

In many regions of Switzerland the situation continued to escalate over the last six months. Davos, known for the annual World Economic Forum, recorded a price increase of 7.6 per cent, the index showed. Zug registered a 5.1 per cent rise, while Zurich and Lausanne had a 3.8 per cent increase, which is still very high, the economists said.

Meanwhile, the consumer price index, which measures changes in the price level of consumer goods and services bought by households, continued its decline, falling another 0.2 per cent from June. At the same time, personal income registered little growth.

The UBS index comprises six sub-indices, which track the relationships between different indicators including purchase prices, house prices, household income, inflation and gross domestic product.

Massive increases

“Dropping consumer prices and a stagnating income cannot form a basis for sustained real estate price increases,” UBS economist and co-author of the report, Matthias Holzhey, warned. “We are in an environment where there is no sound basis for those kind of massive increases. Any further price rises should be seen as overvaluation.”

Property prices particularly increased on demand for real estate as an investment, fuelled by low interest rates. Even in Geneva, where the rise was not as sharp as in other regions, property prices rose 1.8 per cent. This is still significant, considering that the region around Lake Geneva is one of the riskiest zones in Switzerland, Holzhey told swissinfo.ch.

The bubble risk is greatest along the lakes of Geneva and Zurich, in Canton Zug as well as in winter resorts including Davos, Arosa and St Moritz. Holzhey said he expects prices to further increase around Lake Lucerne, in Canton Nidwalden and the region bordering Canton Zug.

The UBS economists say there is now also a bubble risk in the Gstaad region and the area south of Basel, in low-tax communes which attract wealthy individuals.

No immediate bubble

However, although Holzhey expects prices to continue to increase in the country next year, he sees no immediate risk of a real-estate bubble.

“For a bubble we’d need much stronger increases as well as an acceleration of the trend,” Holzhey explained. “A price correction on the other hand may be triggered if some drivers are thrown into reverse.”

An unexpected high increase in interest rates, a credit crunch, an oversupply of real estate or a sharp decrease in immigration are factors which may lead to a correction, Holzhey said.