The Swiss central bank is sounding positively alarmist about the risks to the domestic mortgage and real-estate markets, saying that their vulnerability has risen and that several banks might even face capital adequacy problems.
The susceptibility to a price correction and loan defaults has increased in the Swiss mortgage and real estate markets, member of the board of the Swiss National Bank Fritz Zurbrügg said Tuesday in a speech at the University of Lucerne.
Various indicators pointed to the mortgage market being highly vulnerable, Zurbrügg said.
Firstly, mortgage lending volumes had grown faster in recent years than fundamentals could explain, and mortgage debt in relation to GDP had risen sharply since 2009.
Affordability Risk Peaking
The increase was particularly pronounced last year due to the sharp drop in GDP caused by the coronavirus pandemic. At 150 percent of GDP, mortgage lending in Switzerland was very high by international and historical standards, he said.
Secondly, the data showed that affordability risks had increased in all segments since 2014. They are currently at their highest level, Zurbrügg said. This particularly applied to residential properties bought as investments.
According to the SNB, between 20 and 30 percent of newly granted mortgages would no longer be sustainable if interest rates rise by 3 percentage points. Based on models and estimates, the SNB assumes that the residential property market is between 20 and 30 percent overvalued.
Greater Risk of Price Correction
«In short, we are currently seeing both clear signs of unsustainable mortgage lending and the increased risk of a price correction,» Zurbrügg said.
With an average price drop of 20-30 percent, a substantial portion of some mortgages would no longer be adequately secured in the event of a default.
«As a result, the banks would suffer losses if there were defaults on these mortgages,» the central banker said.
Falling below Minimum Requirements
However, he added, that the SNB’s assessment was that the banks' resilience was currently appropriate. Most banks could now absorb any bad loan losses because of the capital buffers banks have had to hold since 2012. In the case of several other banks, the combination of a price drop and mortgages not being covered would ultimately lead to a narrowing of capital ratios, «in some cases even to below the minimum regulatory requirements.»
