National Bank warns of housing bubble bursting in Switzerland

The Swiss National Bank (SNB) has warned that the current house price bubble could burst, leading to a significant downturn in the economy and financial insecurity for homeowners in Switzerland.

Rise in Swiss property prices not due to economic growth

The SNB report said that the current rise in house prices cannot be explained by economic growth alone, and that low-interest rates are making high-risk mortgages more common. Prices of all housing types have risen by 80 percent in the last decade, and the SNB has claimed that the housing market in Switzerland is 20 percent overvalued.

What is most concerning, according to the SNB, is that mortgage debt has risen to 150 percent of gross domestic product. This means that the current amount indebted through housing is one and a half times the nation’s economic output. 

High-risk mortgages fuelled by low-interest rates in Switzerland

Alongside the rise in house prices, the vice-chairperson of the SNB Fritz Zurbrügg said during a speech on Tuesday that current interest rates are the only thing keeping many mortgages from defaulting. He claimed that around 30 percent of mortgages would be at risk of default if interest rates should rise to 3 percent. 

This is a risk to all mortgage types, as current predictions by Statista show that inflation may increase over the next five years, making a rise in interest rates more likely. “Credit risks in connection with newly granted mortgage loans, particularly affordability risks, have increased substantially over the past few years,” said the SNB, who confirmed that the real estate and mortgage market is highly vulnerable to interest rate increases.

Swiss National Bank does not predict real estate collapse

Despite the warnings by the SNB, the bank has stopped short of mandating safety nets designed to protect the banking system, such as demanding banks keep enough money in reserves to cover a mass default. The SNB predicts that the “low-interest-rate environment is expected to persist and with it the incentives for greater risk-taking.”

Regardless of the current economic situation, it is hoped by the SNB and Zurbrügg that the current reserves built up by Swiss banks between 2013 and 2020 will be enough to cover the losses of any mass defaults. However, Zurbrügg warned banks not to lend to people who could not afford their mortgage if interest rates rise, to avoid the economic downturn.