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• The UBS Swiss Real Estate Bubble Index remained in the risk zone at 1.39 points in the first quarter of 2017 following a moderate increase.
• The increase in home prices outpaced the increase in rents and income.
• Demand for buy-to-let investments also rose, in spite of heightened market risks.
The UBS Swiss Real Estate Bubble Index remained in the risk zone in Q1_2017 at 1.39 index points. The index increased moderately over the slightly revised figure for the previous quarter. The rise was driven mainly by a slight acceleration in nominal price increases for owner-occupied homes amid stagnant rents and income. Demand for buy-to-let investments rose as well. Buy-rent ratio deteriorates further Stagnant rents caused the buy-rent ratio to deteriorate for the tenth time in a row in Q1 2017. At the same time, the percentage of loan applications received by UBS for properties not intended for personal use experienced another slight increase. This can be explained by the fact that buy-to-let investments can produce high returns on equity if they are highly leveraged. Given the continued large number of building permits, it seems likely that construction activity will remain (too) strong in this current year. We estimate that the construction of new apartments will exceed the additional demand for apartments by approximately five to ten thousand units this year. This should keep rents on a downward trajectory, particularly for new apartments. In other words, life is about to get even more difficult for landlords. Investor demand for owner-occupied homes is primarily attributable to the entrenched expectation that interest rates will remain low. However, a rate increase would most likely bring strong demand for buy-to-let investments to an abrupt halt.
Regional analysis The Geneva, Nyon and Morges regions are in a correction phase. Local owner-occupied housing markets have already cooled in these regions. In the past three years, price corrections in Valais, Bernese Oberland and parts of Grisons mean that there are no longer tourist regions on the risk map. The regional risk focus is gradually shifting from Lake Geneva to the regions of Zurich and Central Switzerland.
Methodology The regional risk map shows those regions posing the greatest macroeconomic risks in the event of a Swiss-wide correction. The analysis is based on the population size, the price level and the price behavior for owneroccupied homes.
Chief Investment Office WM | 5 May 2017 | Translation: Matthias Holzhey, economist, Claudio Saputelli, economist, Maciej Skoczek, CFA, economist, Source UBS.
