Overheating in the Swiss Property Market?
--
Introduction
The COVID-19 pandemic blurred the lines between work and home life everywhere across the world. During this time, house prices in Switzerland have risen by about 2%, igniting worries that the property market may be overheated. In the second quarter of 2019, house prices rose by 0.5%, followed by a 2.6% increase in the fourth quarter of 2021.
High demand for housing has caused prices to rise at a faster pace. However, during the COVID-19 pandemic, the Swiss National Bank (SNB) reversed the countercyclical buffer, a rainy-day fund for banks in Swiss to ensure they can weather bad times. By temporarily suspending this buffer, banks were able to lend freely, which increased demand for houses, thereby causing house prices to rise. Between Q1 2020 and Q3 2021, credit to households and non-profit institutions rose 5.1% to 957.039 billion. Easy credit conditions, negative interest rates, and strong demand for housing have raised concerns about a possible overheating in the Swiss housing market. This has prompted the SNB to reverse the countercyclical buffer, despite protests from the Swiss Banking Association (SBA) about the impact on Swiss banks.
This article looks at developments in the Swiss housing market, the rates of urbanization, implications for property prices, and household and banking sector leverage. It then goes on to outline a rationale for the SNB’s decision to re-impose a countercyclical buffer of 2.5%. It concludes with forecasts for the housing market.
Is the Swiss Housing market overheating?
The pandemic has reinforced the demand for Swiss homes as more workers are able to work from home and commute less. Even as property prices have risen significantly, house prices have increased by more than 80% over the past 15 years, according to the Swiss National Bank. This leaves the average price of a Swiss house at 2.6 million Swiss francs ($2.79 million), while the explosion in lending has triggered fears about a damaging collapse if interest rates increased. Switzerland experienced its last property bubble and collapse in the 1990s when house prices plunged after rising strongly during the late 1980s.
As illustrated in Figure 1 below, Swiss house prices have risen consistently over the last three quarters…
