UBS Swiss Real Estate Bubble Index enters danger zone
A sudden increase in Swiss property prices for the third quarter of 2012 has pushed the UBS Swiss Real Estate Bubble Index into the risk zone for the first time since the real estate bubble of the 1980s.
According to a UBS report, all sectors of the index have registered strong increases, except the construction indicator. Of concern is that the price of purchasing a home increased 1% in 3Q this year, while consumer prices dropped 0.2% lower than in June. This suggests a growing market imbalance, as the price of real estate in the long-term should not grow considerably more than the general inflation rate.
Matthias Holzhey and Claudio Saputelli, economists and co-authors of the report, said: “Key drivers were the consumer price index, which was down 0.2 percent in June this year, and stagnating income. The continued sharp increase in household mortgage debt also shows that the currently still extremely low financing costs are critically important for the development of the real estate market.
“Declining consumer prices and stagnating incomes combined with unabated growth in mortgage debt are leading to unsustainable increases in house prices. The index increase reflects the continuing intensification of imbalances and risks on the Swiss housing market.”
The UBS Swiss Real Estate Bubble Index comprises six sub-indices that track the following data: the relationship between purchase and rental prices; the relationship between house prices and household income; the relationship between house prices and inflation; the relationship between mortgage debt and income; the relationship between construction and gross domestic product; and the proportion of credit applications by UBS clients for residential property not intended for owner occupancy.
The UBS Swiss Real Estate Bubble Index is calculated as the average of trend-adjusted and standardized indicators weighted using a principal component analysis. The index level shows the deviation in standard deviations from the average, which is normalized to zero.
Property price increases across Switzerland over the past six months have ranged from 3.8% in Lausanne and Zurich to 5.1% in Zug and 7.6% in Davos. Given the consumer price index has decreased slightly, such increases could be considered an over-valuation. In the event of a sudden increase in interest rates or a glut of property, such an over valuation could lead to a price correction.