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Swiss real estate market UBS Swiss Real Estate Bubble Index 4Q 2016

Risks to the Swiss property market remained elevated in the three months through September, according to UBS Group AG’s quarterly index. “While the buy-to-rent price ratio reached an all-time high, moderate mortgage growth and the slightly-improved economy prevented imbalances in the owner-occupied housing market from widening,” it said in a report.

 

Major Findings

• The UBS Swiss Real Estate Bubble Index stood in the risk zone at 1.35 points after a slight increase in the final quarter of 2016.

• The further increase in the ratio of purchase prices to rents and income reflects increasing interest rate risks.

• The stabilization of the index in the last few quarters is due to the sharp slowdown in household debt growth.

 

UBS Swiss Real Estate Bubble Index

The UBS Swiss Real Estate Bubble Index stayed in the risk zone in 4Q 2016 at 1.35 index points. The index increased only marginally over the slightly revised figure for the previous quarter. The sub-indicators price-to-earnings and price-to-rent increased slightly. On the other hand, the slower growth in mortgage debt had a dampening effect.

Interest rate risks continue to rise
In the meanwhile, the index has been moving in the range of 1.30 to 1.45 index points for one and a half years. The disparities in the owneroccupied housing market have thus stabilized, but have not lessened. As such, the dependence of owner-occupied housing prices on low interest rates has risen further in recent quarters. The buy-to-rent ratio increased for the ninth consecutive quarter, as the average home ownership overheads in Switzerland have been lower than the cost of renting comparable properties since mid-2014. However, if the mortgage rate increases by one percentage point, the costs of an owner-occupied home would again exceed those of a comparable rented apartment, which could trigger a price correction on the owner-occupied housing market.

Debt only driven by new buildings
By contrast, the volume of outstanding household mortgages rose by only 2.6% compared to the previous year. Although this is the lowest value since December 1999, the mortgage volumes are still rising faster than the disposable income of Swiss households. In general, the growth of the mortgage volume is determined by the construction of new apartments, the remortgaging of the housing stock and the amount of the amortization payments. The increase in household debt by CHF 18 billion in 2016 is probably due entirely to lending for new buildings. In the past year, amortization payments are likely to have been higher than the additional lending for the housing stock.

Switzerland UBS Real Estate Bubble Index

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Sub-indices of the UBS Swiss Real Estate Bubble Index

Owner-occupied housing prices relative to annual rent payments

• An above-average buy-to-rent ratio indicates a high dependency on sustained low interest rates or implies expectations of future price increases.

• The long-term average is 26.1 annual rents. In March 1989, the indicator peaked at 29.3.

• After the ninth consecutive increase, in 4Q 2016, it took 29.5 annual rents to purchase a comparable owner-occupied home.

Switzerland Home Prices Relative to Annual Rent Payments

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Owner-occupied house prices relative to household income

The indicator shows whether the price behavior of the owner-occupied housing market is supported by changes in household income. A decoupling of prices from average household income can be interpreted as a sign of interest rate risks.

As a long-term average, it takes 5.3 annual incomes to purchase an owner-occupied home in the medium price segment.

In 4Q 2016, it took around 6.3 annual household incomes to purchase an owner-occupied home in the medium price segment. Compared to the previous quarter, the index rose slightly.

Switzerland Home Prices Relative to Household Income

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Owner-occupied home prices relative to consumer prices

In the long term, owner-occupied housing prices are likely to be oriented towards the development of construction costs and general inflation. A sharp and lasting increase in inflation-adjusted owner-occupied housing prices is thus a warning signal for a possible correction.

• After adjustment for inflation, owner-occupied housing prices are meanwhile around 1% above the high of 1989.

• Owner-occupied housing prices increased 0.6% in real terms due to negative inflation. Year-on-year, a rise of 1.3% was recorded.

Switzerland Home Prices Relative to Consumer Prices

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UBS Switzerland AG
UBS AG is a Swiss global financial services company, incorporated in the Canton of Zurich, and co-headquartered in Zurich and Basel. The company provides wealth management, asset management, and investment banking services for private, corporate, and institutional clients worldwide, and is generally considered to be a bulge bracket bank. In Switzerland, these services are also offered to retail clients. The name UBS was originally an abbreviation for the Union Bank of Switzerland, but it ceased to be a representational abbreviation after the bank's merger with Swiss Bank Corporation in 1998. The company traces its origins to 1856, when the earliest of its predecessor banks was founded.
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