Like so many countries around the world the Swiss National bank has held base rates at 0% for three years now as it attempts to move away from the recent European economic crisis. While this particular strategy, which is replicated by many national banks, works with regards to economic recovery it is proving to be an additional potent fuel to the local property market.
The Swiss government has taken advice from the Swiss National Bank which will impact the capital buffer required by banks in Switzerland with regards to their mortgage liabilities. The buffer has been doubled from 1% of risk weighted positions (secured by residential real estate) up to 2% with further potential to increase this as high as 2.5%.
What does this mean for mortgages in Switzerland?
The very fact that property prices in Switzerland are now at levels last seen in 1989 is a concern for the government and the financial sector. The Switzerland economy has had a very troubled time over the last few years and, in a similar situation to the UK, property prices seem to have run ahead of the economic situation. The raising of the capital buffer required by all banks operating in the Swiss mortgage market will effectively increase the cost of mortgages as well as general housing costs.
Quote from PropertyForum.com : “At this moment in time even the most sensible of investors are struggling to obtain finance for many property projects around the world. It is sometimes easy to forget that these are investors who have slowly but surely built up their assets, never over-extended themselves on the financial front yet somehow they are paying the…..”
In general there is nothing wrong with trying to control, or at least take the heat out of, the local property mortgage market but there are concerns that the new capital buffer levels will only impact the smaller operators. There is a growing consensus that many of the larger banks operating in Switzerland already have significant buffers in place which will mean very little in the way of change to their use of capital in the short to medium term. Whether or not this will reduce competition amongst the smaller provincial mortgage providers remains to be seen but there are concerns it could play into the hands of Switzerland’s biggest financial institutions.
Mortgage lending in Switzerland
When you bear in mind that outstanding mortgages in Switzerland have increased by 25% since 2008 it is not difficult to see why the market may potentially be on the verge of overheating. When you bear in mind the cheap finance available, due to 0% interest rates at the moment, this can only fuel the fire of investment in real estate in Switzerland. The increase in capital buffers for Switzerland’s banking community was not unexpected, indeed a Bloomberg survey earlier this week predicted today’s move, and there is speculation it could yet increase to 2.5%.
It will be interesting to see if today’s move, which will most certainly increase the general cost of mortgages, has a dampening impact upon the property sector or whether investors choose to ignore this new strategy. It could turn into a battle royal between investors and the Swiss government with the short-term future of the real estate market at stake. Many European counterparts will be watching the situation in Switzerland to see the kind of impact it has and whether indeed it can be replicated in other areas of Europe.