ZURICH (Reuters) – Global interest rates are likely to stay low, fuelling an already red-hot Swiss property market that poses risks to financial stability, Swiss National Bank (SNB) Vice Chairman Fritz Zurbruegg said on Tuesday.
“It is to be expected that the global low interest rate environment will remain unchanged for some time to come,” he said in prepared remarks on mortgage and property markets at the University of Lucerne.
An ageing population and a decline in productivity growth are among the structural factors behind the trend, while central banks in advanced economies are pursuing expansionary policy.
“Such policy continues to be necessary in order to counteract the impact of the coronavirus crisis. It is therefore to be expected that interest rates will remain low for some time yet, which means that incentives for increased risk-taking will remain in place,” he added.
The SNB itself has run an ultra-loose policy for years to rein in the safe-haven Swiss franc, which has made investment in Swiss property attractive. Strong growth in mortgage and real estate markets means risks to financial stability have increased, Zurbruegg said.
“We consider the vulnerabilities on the mortgage and real
estate markets to be at a high level at present,” Zurbruegg said, citing in particular the residential property segment and an unusually high 150% ratio of mortgage debt to GDP.
Bank lending accounts for 95% of Swiss mortgage loans, prompting the SNB to keep a close eye on the financial sector.
Between 20% and 30% of newly granted mortgage loans for residential investment property would be deemed unaffordable if the mortgage interest were to rise to 3%, going up to around 40% should the interest rate climb to 4%, he noted.
“We are currently seeing clear signs of unsustainable mortgage lending on the one hand and heightened risks of a price correction on the other,” he said.
The banking system could face considerable losses should
interest rates rise abruptly, he said, although capital buffers meant most banks would be capable of absorbing credit losses.
Data released since the SNB’s financial stability report in June show price momentum continues “unabated”, he said, adding the SNB regularly reassesses the need to reactivate countercyclical capital buffer rules it suspended during the pandemic.
(Reporting by Michael Shields, editing by Silke Koltrowitz)
