Swiss real estate bubble

Swiss banks have agreed to tighten lending conditions for investment properties following concerns by the Swiss Bankers Association (SBA), a self-regulatory body.

Banks move to cool investment property market in Switzerland — Â©Â Alexandre ZveigerÂ |Â Dreamstime.com

The SBA, which represents most of Switzerlandâ€™s banks, has issued new lending guidelines requiring lending deposits of at least 25% of the assessed value of the property for residential investment properties. In addition, minimum annual loan repayments must reduce loans by one third over the first 10 years.

The current rules require a deposit of 10% and a third of the loan be repaid over 15 years.

Despite existing lending restrictions, the amount of mortgage lending in Switzerland has continued to rise, recently reaching CHF 1 trillion.

Low interest rates have increased the attractiveness of investing in bricks and mortar as loans have become cheaper and alternative investments, such as bonds, less attractive. This has helped to push up the price of residential real estate.

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Last week UBS released its real estate bubble index for the last quarter of 2015. According to the bank, the risk moved from 1.34 in Q3 2015, to finish the year at 1.41. Anything over 1.0 is considered risky and anything beyond 2.0 is bubble territory. Before property prices crashed in the 1990s, the indexÂ rose nearly as high as 2.5. The regions currently most at risk include, ZuÌˆrich, Zug, Luzern, Basel-Stadt, Lausanne, Morges, Nyon, Vevey, Geneva and Lugano.

Source: UBS

Swiss property prices, even in the hot spots, wereÂ not as frothy as some other places. A UBS report late last year put London and Hong Kong in bubble territory. Sydney, Vancouver, San Francisco and Amsterdam were all more overvalued than Geneva and Zurich.

Source: UBS

The main driver of the recent increase in risk in Switzerland wasÂ an increase in outstanding mortgage loans, which helped to drive Swiss real estate prices up by 0.5% in the last quarter of 2015 and by 2% for the year. Household mortgage debt was 3.2% higher than at the same time in 2014. Although debt growth slowed in the fourth quarter of 2015 mortgage lending had reachedÂ itsÂ highest level relative to household income in the last five years by the end of 2015.

Swiss housing became less affordable last year. House prices rose 2% while incomes fell by 1.5% over the year. AÂ medium priced house now costs around 6.2 times an average annual household income, said the report.Â The long-term average is 5.3.

Risk has increased substantially over the last three years. At the end of 2012 the UBS Swiss Real Estate Bubble Index was 0.79. By the end of 2015 it was 1.41, a rise of 78%.

There was some good news for renters. Rents were stagnant rising only 0.1% in the final quarter of 2015.

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