The Swiss monetary authorities repeatedly have warned about an overheating of the real estate market and the dangers this implied for the financial system. They now will test the resilience of some twenty banks to sudden changes in the property market.
Stress tests in recent years have become a notable tool of both the Federal Reserve as well as European Central Bank to measure the progress that the financial markets have made in avoiding a repeat of the last major crisis. Not so in Switzerland.
Now, the Swiss authorities seem to have drawn level though: banking regulator Finma is evaluating the resilience of about 20 banks to sudden shifts in the residential housing market, according to a report in «Schweiz am Wochenende».
Glut in Agglomeration Housing
Finma and the central bank have repeatedly warned that the real estate market is a major source of concern for the financial market supervisors as the business boomed due to the negative interest rate regime imposed by the central bank. Companies reliant upon a steady stream of income have boosted their real estate portfolios as fixed-income investments tended to zero.
However, with a glut of residential housing in sub-prime locations, real estate firms have found it increasingly difficult to find tenants. At the same time, prices have risen.
Potential Risks
Should the central bank start raising rates, prices will tend to fall and investors may sit on properties they bought at a higher price and that they can’t let out. Property investors that face such scenarios may also pull down banking institutes that have a strong exposure to the real estate market.
The results of the stress tests are expected for the beginning of next year, according to the report in «Schweiz am Wochenende».
