Swiss National Bank Puts Brakes on Real Estate Market with Rate Increases: Limited Risk of Default

With five increases in the key rate since June 2022, the Swiss National Bank (SNB) has put the brakes on a real estate market that has been growing strongly in recent years. Despite the rise in the cost of mortgages, the risk of borrower default is limited, according to specialists.

In total, the Swiss issuing institute has increased its rate by 2.0 percentage points since June 2022 to bring it currently to 1.75%. A further increase of 0.25 points is anticipated by economists during the monetary policy announcement next Thursday.

This monetary tightening did not remain without consequences on the mortgage market. The indicative rate for a ten-year fixed mortgage is thus at 2.63% and that for five years at 2.55%, the highest since 2011, according to the Comparis.ch portal report. But we are still a long way from the peaks reached in 2008, when the rates for these real estate loans were respectively at 4.67% and 4.51%.

The increase in financing costs has not remained without effect on the real estate market. In the second quarter, price growth in the house segment slowed significantly to 1.2%, compared to +3.6% in the same partial period the previous year. This is the lowest level of growth recorded since 2017, noted Credit Suisse in its latest Moniteur Suisse study.

For apartments, on the other hand, the decline over the period was only minimal, with prices slowing to 3.4%, compared to 3.5% previously. The weakness of supply on the real estate market in Switzerland, however, limits this downward trend.

Low risk of failure

“Owned housing prices are still relatively resilient compared to rising financing costs,” writes UBS in its real estate bubble index. “The decline in transaction volume and increased supply certainly signal a decline in demand for owner-occupied housing, but the overall weak and still declining construction activity makes a significant price correction rather unlikely in the near future,” estimated the bank with three keys.

Jean-Pascal Baechler, head of the BCV Observatory of the Vaud economy, also qualifies the evolution of rates in recent months. “Despite this rise, mortgage rates remain relatively low in historical comparison,” he recalls.

“The end of the monetary tightening phase is approaching and there will therefore be no continuation of the strong rise in mortgage rates, which have been relatively stable for several months,” added Mr. Baechler. Added to this is the fact that many households have locked in their rates in recent years, their interest cost having therefore not changed.

In Switzerland, household defaults on mortgage loans are rather rare, he continues. “If you have obtained your mortgage, your income allows you to face a theoretical rate of 5%, to which are added 1% amortization costs and 1% maintenance costs. All of these charges must not represent more than a third of a household’s income.

al