Swiss banks are asking for looser criteria to grant mortgages, pension funds are increasingly taking a share of the market and small-fry foreign real estate firms are listing their shares on SIX – signs of an impending fatal turn for the home lending business.
finews.first is a forum for renowned authors specialized on economic and financial topics. The texts are published in both German and English. The contributions appear in cooperation with Pictet, the Geneva-based private bank. The publishers of finews.com are responsible for the selection.
Swiss mortgage books in recent years are are reminiscent of a Greek drama unfolding. Where is the sector now: in the phase of rising action, or already falling?
Most classic dramas are marked by a catastrophe. Switzerland’s distorted real estate market looks poised for a similar development.
At the drama’s beginning, central bankers have set the scene with years of ultra-expansionary monetary policy and negative interest rates.
For banks in particular, this was initially a blessing: mortgages were suddenly within reach for a far wider percentage of the population than previously. The lopsided equation between tenants renting and home-owners slowly began evening out.
«Mortgage books blossomed, interest income surged»
Mortgage books blossomed and interest income surged for banks – a moment of rising action in the property drama. The buoyant development is underpinned by a widely-cited UBS bubble index, which has since moved into decidedly risky territory – just one step before a full-blown bubble.
With a view to shielding lenders from the fallout of a real estate bubble bursting, Switzerland’s central bank and government introduced an anti-cyclical buffer which requires banks to underpin their domestic mortgage books with an extra 2 percent of capital. The measure was intended halt careless lending, and to cool the housing bubble.
Predictable, traditional lenders didn’t take kindly to the meddling – partly because pension funds and insurers are exempted from the measure, which applies only to banks.
But it is actually the non-banking players which have expanded their mortgage activities sharply in recent quarters, in the hunt for returns.
The country’s biggest property lender, Raiffeisen, has publicly called for lending rules to be loosened by lowering the measure of lending adequacy on clients, which currently stands at five percent.
The cooperative bank’s line of argumentation for lowering this rate to 3 percent: home ownership is out of reach for millennials and other young potential homeowners by stiff lending requirements.
«UBS and Credit Suisse resist Raiffeisen's controversial proposal»
Raiffeisen is seeing surprising resistance to the proposal from its own ranks: big lenders Credit Suisse and UBS have spoken out against loosening the requirements. Clearly, sinking the adequacy rules would widen the lending market considerably – along with banks’ lending books.
Banks believe they can protect their interest income, currently just 1 to 1.5 percent, by expanding their lending volume.
So far, so good, but no one wants to experience a real estate crash in Switzerland again which destroyed 40 billion in the 1990s should interest rates rise faster than expected.
While macroeconomists forecast interest rates rising gradually when the Swiss National Bank eventually abandons its policy of negative interest rates, it is impossible to know what the economy will look like five, 10 or 20 years out.
Then, inflation surged, forcing the SNB, which had flooded the market with cheap money, to hike interest rates from 3.5 percent to 7 percent in just two years – a disaster for banks and homeowners. Certain parallels to today's situation seem obvious.
Banks are also trying to bolster their lending volume through technology: UBS recently launched Atrium, which links up lenders to institutional investors such as pension funds. The bank collects a fee as a market-maker for the final mortgage.
Glarner Kantonalbank has a similar service, «Kreditfabrik», where it collects financing needs, evaluates the solvency of borrowers and then refers them to a pension fund such as Migros’, for a fee. This has become a popular method for cash-rich pension funds to avert fees on Swiss franc deposits imposed by the central bank.
«Odd offshoots from Swiss property boom»
Other players like Zurich Insurance and Swiss Life have swarmed into neighboring countries to buy large chunks of real estate, especially in Germany. Partly because Swiss Life is the largest property owner in Switzerland, but also because prices in some areas in Switzerland – Zug, Lake Geneva, urban Zurich – have skyrocketed.
The combination of these signs would, in a classic drama, be an indication that rising action is reaching its high point and will soon climax.
The property boom has also produced off offshoots: Varia, an American firm with a holding in Zug, is seeking a listing in Switzerland.The firm wants to finance property buy in the U.S. with the proceeds of the initial public offering.
In June, Investis, which purchases real estate mainly in western Switzerland, also sought a public listing.
Are IPOs like these as well as initiatives like that of UBS, Raiffeisen and Glarner Kantonalbank a sign that the mortgage market has reached its zenith, about to collapse, engulfing banks and non-traditional lenders?
More caution is advised to dial back rampant mortgage lending. The fallout from a housing market crash in Switzerland would be immense compared to the short-term benefits banks and pension funds are eyeing up now.
Frederic Papp joined finews.ch from cash.ch. Previously, he worked as a freelance journalist and later for Zurich private bank Rahn & Bodmer as well as Zuercher Kantonalbank.
Previous contributions: Rudi Bogni, Adriano B. Lucatelli, Peter Kurer, Oliver Berger, Rolf Banz, Dieter Ruloff, Samuel Gerber, Werner Vogt, Walter Wittmann, Alfred Mettler, Peter Hody, Robert Holzach, Thorsten Polleit, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Claude Baumann, Beat Wittmann, Richard Egger, Maurice Pedergnana, Didier Saint-George, Marco Bargel, Steve Hanke, Andreas Britt, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Katharina Bart, Oliver Bussmann, Michael Benz, Peter Hody, Albert Steck, Andreas Britt, Martin Dahinden, Thomas Fedier and Alfred Mettler.
