Record low interest rates fuelling a real estate price boom in Switzerland
Cheap mortgages are driving up residential property prices in Switzerland to levels that are worrying many analysts.
Average house prices in Switzerland have risen as much as 7% in the past year and by almost 11% around Lake Geneva, one of the country’s hottest property markets where modest two bedroom apartments are selling at an average of a million francs, unaffordable for the majority of residents.
Even unexceptional villas in the region are selling for more than two million francs and a similar situation has emerged in the Zurich area, analysts point out.
A study by Comparis, the consumer rating agency, shows that average mortgages dropped in the second quarter of 2010 to historically low levels. Almost one in 10 mortgages in Switzerland are linked to the Libor (London Interbank Offered Rate), with financing at as little as 0.9%. But the rate is subject to change Libor linked mortgages are renewable every three months.
One concern is that if there is a real estate bubble it may burst if lending rates start rising. The Comparis report shows that average mortgages in April, May and June were 2.3% for the benchmark fixed five year term, compared with 2.5% in the first quarter of the year. This is half the 4.6% average in 2008, before the global financial crisis hit.
‘All the ingredients of a huge real estate bubble are brought together in Switzerland,’ said Patrick Raaflaub, chief executive of the Swiss Financial Market Supervisory Authority.
Switzerland experienced a real estate crash 20 years ago that took many local financial institutions, particularly cantonal banks, years to recover from. As far back as last November, SNB vice chairman Thomas Jordan sent a warning about risks in the Swiss property market. ‘Experience shows that periods of low interest rates provide scope for excesses on the mortgage and real estate market. Consequently, in the current environment in particular, attention should be given to ensuring that past mistakes are not repeated,’ he warned.
Martin Scherrer, banking expert at Comparis, said he has never seen the rates so depressed.
‘They are probably at a historic low for 30 years or more,’ he said. There is little chance of rates rising in the short term. ‘Everyone expected the central bank to raise rates in the summer of 2010, but due to the strong Swiss franc it would be a problem for them to do so,’ Scherrer said.
Scherrer said he personally does not expect interest rates to rise for the rest of the year.
But he said home owners should be attentive to changes, which can have a significant impact on housing costs. If the Libor rate changes, they could see payments rise significantly, he warned.
The Swiss government has implemented changes designed to prevent banks from suffering from another real estate crash. These include a requirement for homeowners to provide a minimum 20% down payment for properties. Lenders are also supposed to ensure that borrowers are capable of servicing mortgage payments at rates of up to 5%, Scherrer said.
‘I’m not sure to what extent the bank actually checks up on that. There will certainly be some people who will be unable to make their mortgage payments if rates go up,’ he said, and they will be forced to put their properties on the market which will increase supply and drive down prices.