Real estate bubble index climbs despite subdued price behavior

Zurich and Basel - 4 November 2014

The UBS Swiss Real Estate Bubble Index is now at 1.29 index points after a 0.05 point increase. The rise in the index stands in contrast to the now subdued price behavior for owner-occupied homes, although it does reflect the relatively weaker performance of incomes, consumer prices and rents. 

The UBS Swiss Real Estate Bubble Index rose from 1.24 to 1.29, the first significant rise since mid-2013. The increase in the index contrasts the now subdued price behavior on the market for owner-occupied homes. Low price increases induce a reduction of risks, only if at the same time incomes, consumer prices and rents increase more strongly. This did not occur, however, as the third quarter of 2014 saw declines in both household incomes, down 0.1%, and consumer prices, down 0.3% quarter-on-quarter. Relatively high vacancy rates on a regional basis and declining consumer prices also had a negative impact on rent price performance. For example, quoted rents fell by a nominal 0.5% compared to the previous quarter.

The price gap between owner-occupied and rented properties has become wider as a result. In view of increasingly low opportunity costs or respectively lower returns on safe alternative investments, however, this gap did not dampen investment demand for condominium ownership. The number of credit applications at UBS for properties not intended for self-occupancy remained at a highly elevated level, accounting for 18.3% of all mortgage loan applications. Given the sometimes very low rental income yields, values losses are inevitable in investments of this type when capital costs are normalized. In the event of a trend reversal in interest rates, many investors are likely to aim at reallocating capital into higher yielding investments, which could trigger a sell-off.

In its conditional inflation forecast, the Swiss National Bank (SNB) only expects very low inflation up to 2017. Swiss homeowners should therefore be prepared for mortgages with extremely low interest rates for years to come. Nevertheless prices on the housing market would reach a limit. The SNB has threatened a further increase in the anti-cyclical capital buffer in its quarterly policy assessment if prices do not stabilize. It is also important to focus attention on faltering economic growth. If Switzerland slipped into recession, it would dampen demand for home ownership and could act as a catalyst for an adjustment of imbalances.

The weaker price behavior is leaving its mark on the regional risk map. Homes became more expensive primarily in Eastern Switzerland and in peripheral agglomerations, and in some areas of the Alps and Ticino. For this reason UBS economists downgraded Lucerne from a risk region to a monitoring region. In addition, the regions Zurich Unterland, Mutschellen and Baden are no longer included among the monitoring regions, while the St. Gallen and Linth regions are now counted as monitoring regions.

UBS Swiss Real Estate Bubble Index – 3Q 2014

UBS Swiss Real Estate Bubble Index

UBS Swiss Real Estate Bubble Index – 3Q 2014

Depending on its current value, the index falls into one of the following risk categories: slump, balance, boom, risk and bubble. These categories are specifically defined and ranked in order of risk. The UBS Swiss Real Estate Bubble Index comprises six sub-indices that track: the relationship between purchase and rental prices, the relationship between house prices and household income, the development of house prices relative to inflation, the relationship between mortgage debt and income, the relationship between construction and gross domestic product (GDP), and the ratio of loan applications filed for intended rental properties to total loan applications filed by UBS private clients.

Selecting exposed and monitoring regions

Our selection of exposed regions is tied to the level of the UBS Swiss Real Estate Bubble Index and is based on a multi-level selection process utilizing regional population and property price data.

Regional risk map – 3Q 2014

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