Switzerland’s property bubble is inevitable

Rising house prices have led observers to worry that Switzerland is on the verge of a property bubble. This could be a natural consequence of its economic model, writes Jules Gray

As demand for property in Switzerland continues to rise, there is a risk the nation will be caught in a housing bubble similar to those emerging in France, Sweden and other developed economies  

As with many places that attract vast quantities of the world’s wealth, demand for property is excessively high in Switzerland. With many leading international businessmen seeking to benefit from the country’s relaxed attitude towards regulation and tax, prices for properties – both luxury and modest – have crept up in recent years. According to figures from UBS, over the last five years average house prices have jumped by 35 percent. In popular areas, such as beside Lake Geneva, prices have gone up by as much as 70 percent during that time.

With historically low interest rates and an influx of cash into the banking industry, many think that high house prices are merely a natural consequence of the country’s economic model. So much wealth has poured into the country over the years, attracted by its secretive banking industry, that alongside almost zero percent interest rates it is inevitable that property will become highly sought after.

The problem facing Switzerland is not exclusive. Other countries are also seeing dramatic rises in house prices, six years after a series of mortgage-related crashes caused the global financial crisis. Economist Nouriel Roubini wrote recently that he believes that there is a serious danger of housing bubbles emerging across the world: “…signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centres in Turkey, India, Indonesia, and Brazil.

“Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anaemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.”

Long time coming
Switzerland’s apparent crisis has been building up for longer than just a few years, however. Protests over the lack of affordable housing in the country have taken place this year, especially in the second-largest Swiss city Geneva. Towards the end of 2013, a series of rallies were organised in Geneva, where hundreds of protestors complained about the shortage of affordable housing and lack of cheap accommodation. A particular complaint was at the worryingly low vacancy rate that has sat at around 0.2 percent for the last decade – far below the two percent that is seen as healthy for most cities.

Many observers are becoming increasingly concerned that Switzerland is experiencing a damaging house price bubble that is set to burst in the coming year. UBS economist Claudio Saputelli told reporters in January that his company expected a correction to take place in the market: “Despite slower momentum, valuations in the Swiss owner-occupied housing market have reached a high. This has further increased the risk of a correction.”

He added that the country has been in a “risk zone” with regards to prices for much of the last year (see Fig. 1). UBS’ report added: “A five percent fall in prices or a halving of mortgage growth in the current year would be sufficient for a noticeable calming of the market.”


The government toughened mortgage-lending laws in 2012 in an effort to dampen the market, while the country’s central bank, Swiss National Bank (SNB), has repeatedly warned that the market is overheating to such a level that a correction is inevitable. Last year, SNP chief Thomas Jordan requested a bugger to be introduced for Swiss banks, forcing them to hold an additional one percent of risk-weighted assets to stave off the potential dangers of the housing boom.

Announcing the move, Finance Minister Eveline Widmer-Schlumpf told reporters, “We want to counter pre-emptively the possibly difficult consequences of a bubble. If the situation stabilises, we can abolish it the same way we introduced it.”

Earlier this year, as worries about a bubble increased, the SNB instigated a number of policies to prevent any more dramatic rises. This included doubling the capital buffer requirement to two percent. However, despite a partial slowdown since January, Jordan told reporters in March that the work was not yet done. “The pace has slowed, but we are far away from the soft landing we want. We don’t yet see the slowdown that we would like to see.”

However, this is not the first time that the country experienced such steady growth for its property industry. In 1989, the country saw real estate values rise dramatically, before a sudden collapse during the 1990s that continued until the year 2000. Those values have continued to rise at an average level of 42 percent since the turn of the century.

Soft landing
Writing on his Roubini Monitor website in March, Roubini said that while Swiss house prices were getting close to the levels seen during the 1990s, other considerations mean that it is perhaps not set to experience the collapse of before.

“Switzerland experienced its last property bubble (and collapse) in the early 1990s. Real home prices and real rental apartment prices are headed toward the peaks of that period, with the UBS Housing Bubble Index also rapidly moving toward its previous highs.”

In October last year, the Swiss Government agreed to share financial information with almost 60 countries, which could in turn lead to many wealthy clients moving their money out of the country

He believes that the problem is perhaps less dramatic than people believe, on account of rates being lower than the longer-term average. “The house prices-to-rents ratio remains below its long-term average from the 1970s, and just above the level of the 1990s. The price-to-income ratio is above its 1990s level but, according to OECD estimates (which concur with our estimate of house-prices compared with per capita GDP), remains below its long-term average.”

He adds that the rates on mortgages have also seen a fall from what was being charged during the 1990s. “Equally, the average interest paid on mortgages has declined substantially from the 1990s, despite the increase in the stock of mortgages as a percentage of national disposable income, reflecting the fall in variable mortgage interest rates that occurred in the period. Finally, construction permits are just now back to the levels of the mid-1990s.”

Specific regions within the country are experiencing different levels of valuation rise, but many remain under watch by UBS, which said that “the Martigny economic region is now one of the risk regions due to its strong price growth in the last three years. In contrast, the Saanen-Obersimmental and Unteres Baselbiet regions have seen a slowdown in the market.”

Roubini agrees that the problems vary considerably across the country. “A study using the log periodic power law (LPPL) bubble model to analyse the development of asking prices of residential properties in all Swiss districts [between] 2005 and 2013 suggests that there are 11 critical districts showing signs of bubbles, and seven districts where bubbles have already burst.”

Preventing the sort of crash that occurred during the late 1990s is obviously something that the government has been striving to do. Roubini says that even though a number of regions in Switzerland appear to be on the verge of housing bubbles, it is more likely that things will ease off in the coming months.

In October last year, the Swiss Government agreed to share financial information with almost 60 countries

“Despite these strong signs, the study argues that, based on the economic environment, a soft landing rather than a severe crash is more likely. This is possible in our view given that house prices are not completely unhinged but, if macro prudential measures fail to slow leverage and speculation, a repeat of the previous multi-year bust, which saw a 37 percent decline in real terms and a 22 percent drop in nominal terms, spread over six years, becomes more and more likely.”

Another interesting shift in the country to come about in recent months is the change to its banking laws. With an estimated $2.2trn of offshore wealth in the country, many governments around the world have long called for Switzerland to abandon its secretive banking laws, so that they can see where their wealthier citizens are stashing their cash.

In October last year, the Swiss Government agreed to share financial information with almost 60 countries, which could in turn lead to many wealthy clients moving their money out of the country. This could certainly lead to Swiss properties being discarded as well.

Investing in Swiss real estate has certainly proven lucrative for those lucky enough to enter into the market at the turn of the century, but with prices continuing to skyrocket over the last decade, some sort of correction is almost inevitable. Certainly the lack of affordable housing is something that needs to be addressed by the government, and the recent changes to banking laws that will enforce greater transparency might cause some of the overseas wealth to depart, helping to force down prices. Whether it is as sharp and dramatic a drop as the one seen during the 1990s remains to be seen.