Swiss homeowners face tighter mortgage rules

A plot of land in Zumikon before the start of construction. Keystone

Mortgage rates have never been so low in Switzerland but the days of easy money may be numbered.

Despite a tepid economy, the rock-bottom rates continue to pump Swiss property prices higher, a development that is worrying financial regulators seeking to avoid a bubble.

In a bid to staunch the flow of credit for real estate, the finance ministry has proposed stiffer capital requirements for Swiss mortgage lenders, following direction given by the government last August.

The complex initiative met with opposition from the banking industry in hearings that ended in January.

The Swiss Bankers Association says the proposals are too rigid and expensive to implement, while their negative impact on mortgage clients and the real economy “cannot be reliably estimated”.

But the Basel-based association said that it would agree to temporary measures that would require new mortgage clients to increase their down payments.

“The SBA rejects additional tightening of capital adequacy requirements by the banks in this (mortgage) area,” SBA spokeswoman Sindy Schmiegel told swissinfo.ch.

Schmiegel warned of the “cumulative” effect of other requirements to boost capital requirements for banks.

These stem from efforts by authorities to avoid a repeat of the 2008 financial crisis when UBS, the country’s largest bank, required a government bailout to avoid going broke.

Proposals

Among the finance ministry proposals is for Swiss banks to hold capital for an “anti-cyclical buffer” to provide protection in bad economic times.

Under the Basel III banking agreement, the country’s banks are already expected to boost their capital, through share equity and other assets, Schmiegel said. 

Increasing capital requirements for mortgage lenders would raise the cost of mortgages without reducing risks, she said.

The SBA did not quantify what extra down payments mortgage clients should pay. The guidelines in Switzerland currently call for a minimum deposit of 20 per cent, although this is not set in law.  

Thomas Jordan, the acting chairman of the Swiss National Bank, supports the finance ministry proposals, saying they “should counter potential imbalances in the real estate mortgage markets”.

Jordan has repeatedly raised concerns about these markets and their potential impact on the financial industry.

Back in June 2011, when serving as the central bank’s vice-chair, he said that real estate prices in some regions were “no longer justified by the fundamentals”.

He warned of the threat to Switzerland’s financial stability that would be posed by a “correction” to continued price increases, together with mortgage loan defaults.

All-time low rates

Against this background, mortgage rates continue to plummet.

“They are at an all-time low,” said Martin Scherrer, banking expert for comparis.ch, the consumer information website.

According to a survey conducted by comparis.ch for the fourth quarter of 2011, rates are up to three points lower than in 2008, when the financial crisis started.

At the end of 2011, fixed mortgages with a term of ten years averaged 2.3 per cent, while those with five-year terms were 1.6 per cent.

First-time homebuyers are being encouraged because buying is now cheaper than renting, Scherrer told swissinfo.ch.

“If you make something really, really cheap, people want to buy it,’ he said. “But one always has to keep in mind the risks associated with it.”

Property prices have boomed as a result of the low rates.

“An average medium-sized apartment in Switzerland costs eight per cent more than a year ago,” said Philippe Kaufmann, real estate analyst at Credit Suisse.

“It’s very likely that the prices will continue to grow this year but at a lower level.”

Continued immigration and low interest rates are sustaining demand, Kaufmann told swissinfo.ch.

Boom not bust

Despite extraordinary growth in such places as canton Geneva – where property prices have tripled in the past 12 years – Credit Suisse does not see any signs of a bust in the short-term.

“We don’t see a trigger in 2012 that would burst the bubble, even in Geneva,” he said.

The canton continues to have an extremely low vacancy rate, coupled with a shortage of properties to sustain the market, Kaufmann said.

In other cities where home prices have soared, such as Zurich and Zug, “we have concerns but not that strong”.

Kaufmann acknowledged that some regional banks might face problems “because they expanded their volume of mortgages very quickly”.

Last year, Moody’s, the ratings agency, took the Raiffeisen banking group down a notch because of its “aggressive growth in the mortgage-lending sector”.

Moody’s added that the sector showed “early signs of overheating in certain regions”.

Regulation

Switzerland’s mortgage market is self-regulated by the banks, although Finma, the Swiss Financial Market Supervisory Authority, monitors its guidelines.

Finma has added its voice in support of the government’s call for tighter capital requirements for mortgage lenders, along with “further measures if necessary”.

Kaufmann said the situation in Switzerland is nothing like the subprime mortgage debacle in the US, where banks granted home loans to customers without the means to pay.

Swiss banking mortgage requirements for down payments and proof of ability to pay are far stricter than in America, and Finma can check to ensure that banks are not being “too lax”, he added. 

Meantime, the finance ministry will review feedback from the capital requirement hearings before sending on its final recommendations to the cabinet “in a few weeks”, ministry spokesman Roland Meier said.

Mortgage rates

Mortgage rates are at historic lows partly because of the financial crisis in the euro zone, Switzerland’s biggest trading partner.

The Swiss franc has strengthened against the euro in foreign exchange markets, challenging the Swiss National Bank’s ability to increase rates, which would be one way of cooling down the real estate market.

If the central bank raised them, the franc would increase still further in value, hurting the country’s export sector and the overall economy, experts say.

Stiffening mortgage requirements for lenders and homebuyers is among the few options available to authorities hoping to cool off the real estate market.

While low mortgage rates are a boon for homebuyers, they can also pose a risk. In a worst-case scenario, rising rates can trigger defaults and a possible collapse in house prices.

Lending rules

Swiss banks usually require down payments of 20 per cent of the purchase price of a home before granting a mortgage. They also typically demand, among others things, that monthly payments do not exceed 33 per cent of household income.

But these requirements are not spelled out in revised policy guidelines set by the Swiss Bankers Association, which prefers flexibility to allow bankers to decide mortgage-backed loans case by case.

Finma, the financial regulator, approved the guidelines in October 2011. However, the regulator warned that additional measures were needed to deal with the “growing risks”.