Swiss Property Market a Bubble About to Burst?


Inquiring minds are looking at Europe and the Swiss real estate market wondering if it is a bubble about to burst. Property values seem to have risen well past sustainable levels:

Average house prices have risen by as much as seven percent in the past year and by almost 11 percent 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.

And cracks are showing:

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 percent.

But the rate is subject to change as 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 percent for the benchmark fixed five-year term, compared with 2.5 percent in the first quarter of the year.

This is half the 4.6 percent average in 2008, before the global financial crisis hit.
“All the ingredients of a huge real estate bubble are brought together in Switzerland,” explained 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 years to recover from.

Does the following sound earily familiar?

Last November, Swiss National Bank 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.

“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 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.

Sounds just like the US real estate market, doesn’t it? Maybe, more than people want…

Last November, Swiss National Bank 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.

“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 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.

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3 Responses

  1. Not likely. Switzerland strictly requires a 20% downpayment, and home ownership is at around 34% of population, compared to 67% in US. The housing vacancy rate in Geneva is at 0.23% compared to a US average of around 7%. Meaning rents are falling in US, and presently going up in Switzerland. Unlike in the US, there’s not been vast new empty housing estates – there’s no room.

    • I wouldn’t be so sure, I know one of my colleagues who bought out there and has been boasting about it on a few websites. He’s not the sharpest tool in the box and we would all be gleeful if he got his comeuppance. Incidentally the comparison with vacancy rates with the US might make some sense if the UK had the same rates but it doesn’t and it has just itself suffered a correction in prices too.

  2. Well said John. I’ve seen it all now, a mate of mine bought a place in Switzerland and he’s giving it “I’ve made loads, prices have crept up, the pound and houses have gone down against the Franc”. I’m “Wait a minute, you can’t count that”, he’s “Oh yes I can, if I sold now I could buy something much bigger in the UK”, I’m but your not selling it and anyway you will have to pay CGT”, he’s “Well, I’m really clever anyway and I intensely dislike you”. You couldn’t make it up.

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