The Swiss National Bank, the country's central bank, keeps special attention to the development of Switzerland's real estate market as persistently low interest rates weigh on bank's margins.
In its «Financial Stability Report 2016», the Swiss National Bank (SNB) again highlights the risks to the financial stability and the Swiss real estate market emanating from the concurrent increase in prices and persistently low interest rates.
As the Swiss central bank cut key interest rates to below zero in a bid to make the Swiss franc less attractive for foreign buyers and thus support the flagging export industry, mortgage lending in Switzerland has become cheaper and thus available for people previously exempt from the market. This in turn led to an increase in real estate prices.
Risks Remain
«A further rise in prices would increase the risk of a substantial correction on the real estate market in the event of an interest rate increase at a later stage,» the SNB said in its report today.
Unsurprisingly, mortgage lending growth at domestically focused banks remained strong, the bank said. The exposure of these banks to the mortgage and residential real estate markets «increased substantially».
Margins Under Pressure
With negative interest rates and strong real estate lending growth, the interest rate margins are under pressure. However, after a seven-year downward trend, the the average interest rate margin on outstanding claims stabilized at at a low level. This occurred despite liability margins slipping further into negative territory following the SNB’s decision in early 2015 to reduce the interest rate.
The stabilization of interest rate margins and profit retention has helped to ensure that – despite the increase in exposure – domestically focused banks’ resilience has not deteriorated compared to last year and remains adequate, according to the central bankers.
SNB Is Closely Monitoring Market
Still, the risks remain as even low momentum on the market could lead to a further increase in imbalances.
Therefore, the SNB will continue to monitor the developments on the mortgage and real estate markets closely, paying particular attention to developments in the residential investment property segment as well as to banks' risk-taking in mortgage lending.
