Property tipped to survive economic slowdown

Houses overlooking Lake Zurich, one area where residential property prices are heating up Keystone

Switzerland’s property market is expected to avoid the type of crash seen in other countries despite fears this summer it was starting to overheat.

This content was published on September 8, 2010 - 08:33

A continued steady rise in house prices and demand, fuelled by low interest rates, has led to a spate of warnings from top financial officials in the past few months. But the latest Credit Suisse economic forecast largely dismisses such fears.

Economists at Credit Suisse bank believe a real estate bubble is unlikely in the near future despite some signs of residential property prices heating up in Zurich and around Lake Geneva.

“Although local signs of overheating can be detected, it would be inaccurate to describe the market as being comprehensively overvalued,” said the report, released on Tuesday.

Earlier warnings about a property bubble from the Swiss National Bank and Switzerland’s financial regulator centred on bank lending. Senior officials were keen to remind banks to show restraint after it emerged that the volume of mortgage lending had risen 5.2 per cent last year.

Tight lending conditions

Mortgage lending in Switzerland has been tight since the country suffered in the property crash of the 1990s. Buyers of residential homes can expect to be asked for a 20 per cent down payment on a property before receiving a loan.

The Credit Suisse research revealed that just SFr13 billion ($12.9 billion) of the total SFr725 billion in mortgage loans issued in 2009 were issued to people who stumped up less than a 20 per cent deposit.

PostFinance, the banking arm of the post office, promised in its annual report for 2009 to remain prudent despite a rise in demand for mortgages since interest rates were slashed to virtually nothing in Switzerland.

“Despite fiercer competition among mortgage lenders, PostFinance will continue its conservative approach to risk. This approach is paying off, as PostFinance has not reported any mortgage defaults so far,” the bank stated.

However, Credit Suisse did identify two key areas of potential disruption for the property market in the next three years. One was the risk of institutions, such as pension funds, pumping too much spare cash into Swiss real estate in the light of volatile stock markets making other investments too risky.

Critical point

But a more serious threat would be that of property prices rising above average household disposable incomes. As in the early 1990s, this could force a market collapse as people simply become unable to afford homes.

Credit Suisse research showed that property prices and household disposable income were starting to move in opposite directions, posing just such a risk. Rising unemployment and taxes coupled with low wage increases have dented purchasing power just as house prices are showing signs of moving upwards again.

But Credit Suisse chief economist Martin Neff told that such a catastrophic real estate collapse was unlikely unless it was accompanied by a sudden rise in interest rates that dented people’s ability to service their mortgage repayments.

“We are quite far away from the critical point,” Neff said. “It would become dangerous if property prices rose by ten per cent while interest rates tripled from their current position.”

Rents have risen

In any case, Neff remained confident that banks had learned their lessons with improved lending conditions in the present climate.

“It was very easy to get credit at the end of the 1980s – if you had some land, you got a mortgage overnight,” Neff said. “We’re much more cautious with our financing today.”

Property firm Wüest and Partner was also confident that the value of housing would not become a problem despite a one per cent rise in asking prices of residential real estate in the latest quarter.

“We witnessed consistent price rises in the few years leading up to 2008,” spokesman Urs Hausmann told “We then saw a negative price trend as the effects of the recession took hold. Prices are picking up again, but at a slower rate than before 2008.”

Experts believe that demand for home ownership may start to slacken slightly as the reduced rate of immigration into Switzerland puts a brake on rental prices. A large influx of foreign workers in the past five years has increased demand for rental flats, but immigration levels are forecast to be only around half as strong as the boom year of 2008.

Switzerland has one of the lowest rates of home ownership in the developed world. The recent trend of rising rents and lowering interest rates has boosted the rate of home ownership to 40 per cent, but this is still well below countries such as Britain, Spain and Germany.

Matthew Allen,

Credit Suisse forecast

Credit Suisse’s economic research forecast the Swiss economy to expand by 2.4% this year, but for growth to drop by half that rate in 2011.

The main reason for the slowdown in recovery was that government economic support packages are due to expire at the end of 2010.

Consumer spending is likely to be hit by increased unemployment – peaking at 3.9% this year – and lower wage hikes. Consumer spending growth was therefore tipped to slow to 1.2% in 2011 compared with 1.5% this year.

Value added tax will rise from 7.5% this year to 8% in 2011, while unemployment insurance contributions will also rise.

Exports, that will have risen by 8% year on year in 2010, are expected to expand at the slower rate of 3.5% in 2011. Import rates are forecast at 6.5% growth in 2010 and 3.5% in 2011.

The construction industry will slow next year, according to Credit Suisse, but will not experience a crash.

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