Central bank sounds warning about ‘vulnerable’ housing market

Swiss property prices have risen around 80% in the last 15 years. © Keystone / Gaetan Bally

The Swiss National Bank (SNB) has repeated warnings that the house price bubble could burst with severe consequences for homeowners, banks and the economy.

“We consider the vulnerabilities on the mortgage and real estate markets to be at a high level at present,” SNB vice-chairman Fritz Zurbrügg said during a speech on Tuesday.

Property prices have risen around 80% in the last 15 years whilst mortgage debt has grown to 150% of gross domestic output (GDP). Real estate is 20% over-valued at present, according to the SNB.

Rock bottom interest rates have contributed to a housing boom in recent years. The SNB believes that up to 30% of newly granted mortgage loans would be at risk of default should rates rise to 3%.

“Banks would suffer substantial losses in the event of an abrupt and steep interest rate rise combined with declining real estate prices,” said ZurbrüggExternal link.

He warned banks not to lend to people who could not afford to service mortgage debt if interest rates rise.

But he stopped short of recommending a resumption of counter-cyclical buffers, which oblige banks to put aside capital to cover loan defaults. The 2% capital buffer requirement was suspended last year to help banks issue emergency loans to companies during the Covid-19 pandemic.

Despite its warning, the SNB is not predicting an imminent collapse of the housing market. It believes interest rates will remain low for the foreseeable future and is satisfied that the capital buffers built up by banks between 2013 and the start of 2020 are adequate for the time being.