No real estate bubble in Switzerland

After the Swiss National Bank's repeated warnings against overheating the real estate market, experts now believe Swiss investors are not at risk. No real estate bubble is expected.

In its Financial Stability Report of June 2010, the Swiss National Bank cautioned that there were signs of overheating in the Swiss market for residential housing. The SNB pointed out that its estimates were based on field research on bank mortgage lending to private households. The research did not cover commercial real estate. Nevertheless, investors became concerned that the institutional market and their own real estate investments might be at risk.

No sign of a price bubble

Various reports laid those concerns to rest in autumn. A report by Fahrländer Partners in cooperation with BAK Basel Economics confirmed that there was no sign of a price bubble on the Swiss real estate market. The authors see no indication of speculative exaggeration, not even in those regions where prices had risen significantly, like Zurich, Lake Geneva and Basel. But downward corrections will be inevitable in those regions. Given current interest rate levels, which remain low, the authors of the report anticipate generally stable or even slightly rising price trends in the coming months, especially in the market for high-end real estate.

"Immo-Monitoring", a review published by the consulting firm Wüest & Partner, reaches similar conclusions and forecasts that prices on the private housing market will continue to rise steeply. Despite occasionally soaring prices and interest rates at record lows, they see no mortgage bubble in Switzerland. Price rises are purely local. Therefore, overheating is not an issue.

Stable returns on Swiss real estate products

According to UBS, risk premiums for the Swiss market as a whole will remain at average levels in the long term. Even with rising interest rates, UBS does not expect to see any significant change in initial rates of return on the institutional real estate market nor, as a result, any decisive impact on change in value returns or on expected all-in rates of return for Swiss real estate products.

For the institutional market, UBS sees several arguments favouring continued stability on the Swiss real estate market. The volume of commercial mortgages has grown at a considerably slower pace than GDP over the last ten years. Moreover, the real estate holdings of professional investors have appreciated at more or less the same rate as inflation over the long term, and the declining return on 10-year Federal bonds has hardly had any effect on the initial rates of return on real estate benchmarks (see graph).

Graph: Initial real estate rates of return and 10-year Federal bond yields (%)

Source: IPD (Investment Property Databank), UBS Investment Bank