Switzerland’s property market is booming and the government feels the expansion, now heading into its second year, leaves the country’s market in danger of overheating. In an effort to cool things off, the Swiss government has raised the capital bar – the amount of capital banks must hold on their mortgages – to reduce the rate of new sales.
Switzerland faces a double pressure on housing costs, as immigration rises on one side and the Franc matches it on the other, prompting the Swiss National Bank to reduce interest rates sharply to stem the rise. Part of the pressure swelling the Franc, meanwhile, comes paradoxically from Switzerland’s perceived status as a safe haven for investment; between foreigners and their money, the Swiss were left looking for a tool to rebalance their economy.
Meanwhile, the price of a freehold flat in Switzerland is now 76% higher than it was in 2000, an average year on year rise of 5.4%.
That’s sharp enough to cut into the pocketbooks even of the famously prosperous Swiss, and the effects on the wider national economy shouldn’t be underestimated either. The Swiss economy grew somewhat better than expected last year, closing out the fourth quarter at a better rate than neighbouring Germany on a base of improving exports. But in the first three quarters, the economy grew by 1.9% – and mortgage volume by 4.4%. The growth in mortgage lending outpaced Swiss GDP last year as a whole, which raises the heart rates of those Swiss financiers who remember the 1990s real estate collapse.
In response, the Swiss government has altered the rules the Swiss National Bank must follow by raising the capital it must hold per loan. Technically, this financial tool is referred to as a ‘countercyclical buffer,’ and banks must now hold 2% extra capital on their loans, as against the 1% required before. The SNB can push this figure to 2.5%, and it’s currently the only instrument at the SNB’s disposal that doesn’t risk seeing the Franc bid up even higher by investors seeking a haven from the continuing Eurozone crisis.
The countercyclical buffer was first used in February of last year, at the SNB’s recommendation, and the SNB stated that this had cooled lending slightly. The Chairman of the SNB, Thomas Jordan, told Swiss TV that ‘The buffer has worked well up to now in terms of building capital in the banking system, but went on to say that ‘we are still not happy with developments in mortgage lending, it hasn’t slowed enough. Therefore, it is necessary to raise the buffer.’
Switzerland’s banking sector is fragmented, characterized by many small banks, which are capable of exerting an effect as a group, but which are individually vulnerable to the financial market.
The Swiss Banking Association said in a statement that it acknowledged that the housing market was overheated, but that it questioned the efficacy of the countercyclical buffer. ‘Uncertainty over its effects on the economy as a whole are high,’ the organization said.
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