Swiss Real Estate Stays in the Spotlight for the Wrong Reasons

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Switzerland's property-market watchdogs aren't likely to catch a break.

With European interest rates set to remain low for even longer, that's going to further fuel the ongoing exuberance in Swiss real estate that's seen multiple warnings this month alone. The issue is particularly acute in buy-to-let properties, as insurers and pension funds look to compensate for otherwise meager returns.

The risks were great enough to warrant the attention of the International Monetary Fund even five years ago, and since then the Swiss National Bank has implemented the world's lowest interest rate. Immigration has slowed and the vacancy rate is nearing levels last seen in the 1990s, when there was a real estate crisis.

The central bank said this month that it's watching closely and sees a “particular” risk in residential investment property. That came not long after a similar warning from the government, and the IMF may raise red flags when it presents its health check of the country's financial sector next week.

Read More: World's Lowest Interest Rate Brews Trouble for Switzerland

“Now that interest rates are likely to be low for longer than before, the concern of the SNB is legitimate,” said Jan-Egbert Sturm, director of the KOF Swiss Economic Institute in Zurich. “It remains something we have to watch, that's proving a worry.”

The IMF's last financial stability assessment of Switzerland was in 2014, and it found that low borrowing costs and high liquidity were leading to “bubble-like dynamics in some regions and market segments.” That year the government required banks to increase their capital cushion, while mortgage-lending standards have also been stiffened.

With concerns in focus, the Swiss Bankers Association lobby group is reviewing the situation and said this month it will amend its self-regulation for the mortgage market if it concludes there's a buildup of risks.

Construction permits dropped in the latter half of 2018, according to Zuercher Kantonalbank, suggesting the market might be cooling of its own accord. But that may be masking sectoral fragilities, said Ursina Kubli, head of real estate analysis at the bank. Fewer permits were issued in cities, where demand is strong, while they remain high in many rural areas that are “struggling with vacancies.”

The slowdown “should not be considered as healthy caution among investors,” Kubli said.

The State Secretariat for Economic Affairs expects a soft landing for property, but it's mindful of the buy-to-let concerns.

“It's possible for a small segment to become a problem for overall financial stability,” said Ronald Indergand at the SECO. “Just look at the subprime crisis in the U.S.”

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jan Dahinten

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