Low mortgage rates fuel house price increases

Swiss home buyers have never had it so good, at least when it comes to mortgages.

Interest rates remain at rock-bottom levels and there is no sign - yet - of them rising.

A report released on Tuesday by Comparis.ch, the Swiss consumer rating agency, showed that average mortgage rates, already quite cheap, fell even lower in the second quarter of 2010 from the previous three-month period.

The agency’s “barometer” of rates revealed that average mortgages in April, May and June were 2.3 percent for the benchmark fixed five-year term, compared with 2.5 percent in the first quarter.

This is half the 4.6 percent average in 2008, before the global financial crisis hit.

Rates for fixed 10-year terms dropped in the second quarter to 3.1 percent from 3.3 percent.

Martin Scherrer, banking expert at Comparis.ch, said he has never seen the rates so depressed.

“They are probably at a historic low for 30 years or more - since I’ve been alive,” Scherrer told Swisster.

The cause of the bargain rates is the monetary policy of the Swiss National Bank, put in place initially to counter the financial crisis by cutting interest rates.

“Everyone expected the (central) bank to raise rates in the summer of 2010, but due to the strong Swiss franc it would be a problem for them to do so,” Scherrer said.

That’s the good news.

On the flip side, the cheap money has driven up house prices in Switzerland to levels that are worrying many analysts.

Modest two-bedroom apartments in the Lake Geneva area, one of the country’s hottest property markets, are selling at an average of a million francs, unaffordable for a majority of residents.

Unexceptional villas in the region are selling for more more two million francs and a similar situation has emerged in the Zurich area.

Average house prices in Switzerland have risen as much as seven percent in the past year, and by almost 11 percent around Lake Geneva.

“All the ingredients of a huge real estate bubble are brought together in Switzerland,” Patrick Raaflaub, CEO of the Swiss Financial Market Supervisory Authority (FINMA) recently told Zurich newspaper NZZ am Sonntag.

As far back as last November, SNB vice-chairman Thomas Jordan sent a warning about risks in the Swiss property market, which weathered the financial crisis without difficulty.

“Experience shows that periods of low interest rates provide scope for excesses on the mortgage and real estate market,” Jordan said.

“Consequently, in the current environment in particular, attention should be given to ensuring that past mistakes are not repeated.”

The reference to past mistakes alluded to the Swiss real estate crash of 20 years ago that took many local financial institutions - particularly cantonal banks - years to recover from.

In a message geared to lenders Jordan added: “Caution must remain the watchword when granting loans”.

Scherrer said he personally does not expect interest rates to rise for the rest of the year.

But he said home owners should be attentive to changes, which can have a significant impact on housing costs.

Almost one in 10 mortgages in Switzerland are linked to the Libor (London Interbank Offered Rate), with financing at as little as 0.9 percent.

The catch is that the Libor, a reference rate for lending between banks in the wholesale market, is subject to change.

Libor-linked mortgages are renewable every three months.

Scherrer said homeowners with such mortgages are currently benefiting from an incredibly good deal.

But if the Libor rate changes, they could see payments rise significantly, he said.

It is worthwhile ensuring, he said, that any such mortgage agreement allows for a transfer to a fixed-term alternative if rates jump.   

The overwhelming majority of Swiss home buyers - 79 percent - are taking out fixed-term mortgages, trading in higher rates for longer term security.

The average term has risen in the last three months to 7.2 years from 6.5 years in the first quarter of 2010, with average mortgage debt estimated at 400,000 francs.

Variable rates, which averaged 2.7 percent in the second quarter, have fallen out of favour.

Scherrer said the government has implemented changes designed to prevent banks from suffering from another real estate crash like the one in the early 1990s, which occurred when interest rates were as high as eight percent.

These include a requirement for homeowners to provide a minimum 20 percent down payment for properties.

Lenders are also supposed to ensure that borrowers are capable of servicing mortgage payments at rates of up to five percent, Scherrer said.

“I’m not sure to what extent the bank actually checks up on that,” he said, noting that some individuals may be carrying large debt loads for cars and consumer items.

“There will certainly be some people who will be unable to make their mortgage payments if rates go up,” he said.

Such people will be forced to put their properties on the market, which will increase supply and drive down prices, Scherrer said.

Higher rates will also dampen interest in home buying from renters, said.

A Comparis study in March showed that 50 percent of renters who are looking to buy homes were attracted by the low financing rates.

But Scherrer is making no lon-term predictions about the Swiss real estate market. “It depends on how the interest rates go - if they go up slowly there should be less of a problem.”