SNB Sees Risk of More Build-Up of Swiss Mortgage Imbalances

(Updates with rate decision in 10th paragraph.)

June 19 (Bloomberg) — Discrepancies in the Swiss real estate and mortgage market could increase, the country’s central bank said, calling for additional regulatory measures.

“The risk of a further build-up of imbalances on the Swiss mortgage and real estate markets persists,” the Zurich-based Swiss National Bank said in its annual financial stability report published today. “Given the persistence of the low interest rate environment, banks and authorities should remain alert and take the necessary steps to keep risks for financial stability in check.”

A pledge by the central bank to keep the franc weaker than 1.20 per euro has kept borrowing costs low. That’s led residential real estate prices to reach a two-decade high, while the rate of mortgage lending has exceeded economic growth.

In a bid to prevent the market from overheating, the government in January forced banks to hold additional capital as mortgages. That countercyclical capital buffer — now at 2 percent — can be raised as high as 2.5 percent.

“During the first quarter of 2014,” imbalances on the mortgage and real estate markets were “largely unchanged,” the SNB said. “This suggests that measures such as the revision of the self-regulation rules in 2012 and the activation of the CCB in early 2013 may have helped contain market momentum,” it said. “Experience shows, however, that short-term changes in momentum do not necessarily imply a change in trend.”

‘Cautious Lending’

“Efforts should now be directed towards preparing regulatory measures that could be implemented swiftly should momentum pick up again on the mortgage and residential real estate markets,” the SNB said in today’s report. These could include steps “that give banks stronger incentives to pursue a more cautious mortgage lending policy,” it said.

The central bank’s remarks echo comments by Mark Branson, chief executive officer of Swiss market regulator Finma, who earlier this week said he would welcome further measures to curb mortgage demand.

A housing-market resurgence is underway in other countries as well, with International Monetary Fund Deputy Managing Director Zhu Min warning last week of the need to “guard against another unsustainable boom.” Bank of England Governor Mark Carney said on June 12 that rising mortgage debt driven by surging home prices may threaten Britain’s recovery.

In Switzerland, central bank Vice President Jean-Pierre Danthine has stressed that rates can’t be raised while the currency ceiling, which was introduced in 2011 to stave off deflation and a recession, is in place.

Bubble Repeat

The SNB today left its interest-rate target range at zero to 0.25 percent and the cap on the franc unchanged.

The Swiss economy suffered a slump in the 1990s after a housing bubble collapse, causing the failure of banks including Spar-und Leihkasse Thun and Solothurner Kantonalbank.

In today’s report, the SNB warned of a repeat of the situation, highlighting that last year “domestically focused commercial banks further increased their already high exposure to mortgage and real estate market risk.”

Switzerland’s biggest mortgage lenders include Raiffeisen Schweiz and cantonal and regional lenders such as Zuercher Kantonalbank and Basler Kantonalbank.

“When defining their capital plans and target values for mortgage lending or interest rate risk, banks should ensure that they are able to withstand the potential losses associated with a combination of a sudden and substantial increase in interest rates and a price correction on the real estate market,” it said.

–With assistance from Jan Schwalbe in Zurich.

To contact the reporter on this story: Catherine Bosley in Zurich at [e-mail] To contact the editors responsible for this story: Craig Stirling at [e-mail] Zoe Schneeweiss, Jeffrey St.Onge