The Knock-on Effect
One of the leading causes for the increase in property prices in Switzerland has been the low cost of borrowing. The Swiss National Bank stressed that, while it has kept cutting interest rates to maintain exports, the knock-on effect has been that mortgages have also become cheaper. This has in turn made the purchase of a Swiss property more accessible to a wider scope of clientele, as more people have been able to enter the market with the aid of bank lending.
Swiss mortgage interest rates have effectively nearly halved from an average of 3.3% at the end of 2007 to only 1.8% at the end of 2015. This is a notable reduction in the cost of borrowing for aspiring house owners. To demonstrate the significance of the difference, take a mortgage with a value of CHF 250,000 over 25 years as an example. At 2007 interest rate levels, such a mortgage would require a monthly payment of CHF 1,228 and a cumulative interest payment at the end of the 25 year period of CHF 118,391. By merely altering the interest rate down to the 2015 level of 1.8%, the monthly payment drops by nearly CHF 200/month to CHF 1,032 and the total interest paid falls by around a half to CHF 59,483.
That would suggest that, in terms of monthly payments, at 2015 levels, a purchaser would be able to afford a CHF 300,000 mortgage for the same monthly cost as a 2007 mortgage borrower of CHF 250,000. Further, even under this scenario, the mortgage borrower would only be repaying a total interest amount of CHF 71,379. Essentially this has allowed more people to be able to access mortgages and purchase properties. This increased demand, in turn, has contributed to higher property prices.
The concern, though, is that should interest rates begin to rise while property prices are at higher levels, this would result in a significant correction in the real estate market. This is emphasised by the extended concern that the Swiss market may be in a property bubble. As such, the Swiss National Bank stated that it is closely tracking how the mortgage and real estate markets are developing. In particular, the Bank is monitoring the residential investment property market and the actual risk attitude of the Swiss banks relative to their mortgage lending.
Already there has been a significant increase in the size of the domestic Swiss mortgage portfolio from CHF 439.4bn in January 2000 to CHF 939.5bn in August 2016.That implies that Swiss mortgages have increased by 2.1x over the since the start of 2000. Equally notable is the value of mortgages to total domestic loans – since January 2000 to August 2016, the share of mortgages to total loans has risen from 63.0% to 74.7%.
This emphasises the extent of the growth in the domestic mortgage market. The foreign mortgage market, on the other hand has reduced in value over the same time period from CHF 8.6bn to CHF 7.9bn. This also reinforces the concern that, if interest rates were to be raised, this large volume of mortgages may become more difficult to be repaid and thus the property market may be subjugated to downward pricing pressures.
Source: Swiss National Bank