The high level of immigration combined with low interest rates has given rise to significant demand for home ownership and, consequently, to higher prices. This situation is not without its risks for banks when it comes to financing. In collaboration with the Institute for Financial Services Zug at the Lucerne University of Applied Sciences and Arts, as well as with other experts, KPMG has carried out an analysis of the forces at work in the various cause/effect relationships in the Swiss real estate and mortgage market. The results are examined on the basis of seven hypotheses.
Switzerland is extremely attractive, both as an economic area and as a real estate market. Thanks to its sound economic environment, political stability and exceptionally high quality of life, more highly skilled workers are entering the country than leaving it. This has a positive impact on demand for real estate. Commercial and residential properties in attractive locations, such as the greater Geneva and Zurich areas, are particularly highly sought after. In recent years, a few regions and subsegments have seen real estate prices increasing well in excess of inflation and are showing signs of overheating. Taken as a whole, however, Switzerland has no price bubbles at present, because the price rises observed can, to a large extent, be explained by natural market factors, both in terms of the markets for home ownership and with regard to investment properties.
In view of constantly changing framework conditions, an adjustment of the price structure in the residential and commercial real estate market is to be expected sooner or later. There are several reasons for this: first of all, it is not certain how long the favorable economic conditions will last, and therefore continue to fuel the seemingly endless influx of skilled workers coming into Switzerland. Secondly, it is unclear how long the low interest rates will persist. Although general rules concerning affordability have already been set out which also take into account higher interest rates, there is still a high degree of uncertainty. The necessity for refinancing after a fixed-rate mortgage has expired – possibly at a significantly higher rate of interest – is something that is often forgotten about. The Swiss National Bank and the Swiss Financial Market Supervisory Authority have warned against this scenario. “Exception to policy” deals, where the basic principles of a sound lending policy are not complied with, play a fundamental role in this. If banks want to prevent losses as far as possible, they will combine long-term fixed-rate mortgages in particular with amortization policies that are also formulated on a long-term basis.
Approximately three quarters of the total revenue of the regional and cantonal banks which are actively involved in real estate financing comes from granting mortgage loans. The risks associated with this must be minimized by employing appropriate organizational measures, particularly in light of the low interest rates, which could be tempting for borrowers. Risk policies should be formulated in a way that clearly defines the geographical scope involved as well as the criteria for granting loans.
Even though comparatively low interest rates may still be expected in the foreseeable future, banks would be well advised to prepare for sudden and unexpected developments by simulating them with the aid of intelligent early warning systems, scenario analyses and stress tests, as well as taking countermeasures if necessary. This also includes elaborating their asset and liability management in a way that offers them protection in the event of any abrupt rises in interest rates, even if this reduces their earnings.
In collaboration with Prof. Maurice Pedergnana, from the Institute for Financial Services Zug at the Lucerne University of Applied Sciences and Arts, and Stefan Fahrländer and Stephan Kloess, experts in the real estate market, KPMG has carried out an analysis of the forces at work in the various cause/effect relationships in the Swiss real estate and mortgage market. A supplementary survey of approximately 20 banks which are actively involved in mortgage lending has also been conducted.
The results are examined on the basis of seven hypotheses:
- Potential for adjustment in the medium term, despite positive long-term trends
- Real estate market dominated by macroeconomics
- High demand versus stagnant supply
- Returns geared toward the wrong criteria
- Tempting interest rates
- Further volume growth generates higher risks
- Risks in bank balance sheets are unavoidable but manageable
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