A fall in the value of high end housing, particularly in hotspot areas such as Geneva and Zurich, combined with a slowdown of overall price increases across Switzerland could signal the end to a troubling property bubble in the country.
The latest statistics are a cause of some relief to those who remember the 1990s Swiss housing crash that saw many people lose their homes, banks lose billions of francs and some financial institutions disappear altogether.
A combination of rock bottom interest rates, rising immigration and the declining performance of other investment classes, such as bonds, saw average property prices escalate by more than a third across Switzerland over the last five years. In Geneva and Zurich the cost of buying a home shot up by as much as 70% in the same period.
It is in these hotspots, fuelled by large influxes of well-heeled immigrants, that experts believe house price bubbles already exist, forcing people on more modest incomes away from urban centres. Whilst property prices are more sustainable in most parts of the country, observers fear a ripple effect across the board if a localised bubble were to burst.
But the tip of the iceberg began to melt between August and September this year. The cost of buying the most expensive houses Swiss-wide declined nearly 5%, according to property monitoring firm Farhländer Partner. And even modestly priced houses fell in value in Geneva and Zurich.
These figures have been affirmed by other price monitoring agencies, including the Federal Housing Office.
“This development is long overdue,” Fahrländer’s Dominik Matter told swissinfo.ch. “Prices have reached such high levels in certain geographic areas and market segments that households simply could no longer afford afford them.”
Matter also believes that regulations – both self-administered by domestic banks and imposed by the Swiss National Bank (SNB) – are leaving their mark.
In 2012 the Swiss Bankers Association (SBA) devised non-binding rules in an effort to stem the rising mortgage loans being handed out by its members. These included a requirement for homeowners to pay back one third of their loan within 20 years and outlawing the practice of accepting pension savings as collateral. These self-regulations were tightened up further in June this year to insist on partial loan repayments within 15 years.
On top of these guidelines, the SNB has twice (in 2013 and 2014) called on the government to impose binding capital requirement regulations on banks in an effort to cool mortgage lending. The combined effect has been to force banks to set aside 2% of their capital reserves to cover possible mortgage defaults. In effect, with every CHF100 that a bank loans out, it has to set aside two francs of its own money to cover default risks.
SNB chairman Thomas Jordan acknowledges that home prices are growing at a less alarming rate this year, but has repeatedly warned that the danger of a bursting property bubble remains. “This is a step in the right direction. Nevertheless, imbalances remain. It is therefore still too early for an all-clear,” he said in June.
Champagne corks are not quite ready to pop with the first signs of a potential stabilisation in real estate prices. For a start, nobody can definitively say if price corrections will continue in an orderly manner rather than fall off the edge of a cliff in future.
And accompanying the decline in property prices is a slight fall in overall household income, which further dents the ability of many people to prop up property prices with waning spending power. Rental prices are also declining at a more rapid rate than owner-occupied properties, giving less incentive for people to buy and let out second homes.
More than 18% of all people applying for mortgage loans at UBS want to invest their spare cash in bricks and mortar. But that number could shrink if returns on those investments, in the shape of rental income, reach unacceptably low levels.
This has led UBS to raise the danger levels in its Real Estate Bubble Index despite property prices cooling off. The risk has been raised by the weakening ability of consumers to support current price levels that are still rising across the board, albeit at a lower rate than in previous years.
However, UBS property specialist Claudio Saputelli believes that the market is under control for the moment. The Swiss economy may be wavering slightly in the face of downturns in other important global trading markets, but it remains relatively robust for the time being.
The rate of immigration is certainly threatened by a Swiss vote in February to restrict the flow of foreign workers. But it will probably take more than a year for the government to define and put into place measures that are designed to address the initiative, and even more time for them to show significant effects.
A separate initiative to impose more severe immigration restrictions was rejected by voters on November 30.
“The biggest risk to the housing market would be rising interest rates,” warned Saputelli, echoing previous fears that any sudden increase in the cost of financing homes could result in defaults and possible foreclosures.
Fortunately for homeowners with mortgage loans, the SNB does not perceive much likelihood of an interest rate rise until 2017. But the important thing for the SNB is getting the levels of housing debt (that currently make up 90% of all household debt) down to more manageable levels before rates begin to rise.
The jury is still out on whether Switzerland really is experiencing a property price bubble. Proof of such a situation can only be tested if such a bubble would burst. But observers believe that homes in some areas of Switzerland are currently over-priced.
Unlike the last property issues of the 1990s, house prices have not this time been driven by rising economic prosperity, increased consumer spending power and lax lending standards. By contrast, prices have soared in recent years as a result of an economic downturn that has both forced interest rates down to rock bottom levels and attracted foreign investment into ‘safe haven’ Switzerland.
Last year outstanding Swiss mortgage debt rose CHF24 billion to CHF712 billion. That’s 109% of Switzerland’s entire economic output (GDP) for 2013 – one of the highest mortgage debt to GDP ratios in the world. Some 90% of all Swiss household debt (which includes loans of all kinds) is wrapped up in bricks and mortar.
Switzerland is by no means the only country that has attracted property price concerns. The rising cost of buying homes in countries such as China, Canada, Australia, New Zealand, Norway and Sweden is also worrying observers.