Swiss mortgages build on firm foundations
The Swiss franc’s appreciation may be strangling some of its mortgaged-to-the-hilt neighbours, but in the landlocked alpine nation, business couldn’t be better. Switzerland’s mortgage market, one of the largest in the world as a proportion of gross domestic product, is in growth mode.
In the first six months of this year, bank lending grew by 5.2%, reaching a record high of Sfr1 trillion. Mortgages represent some 80% of domestic lending, and this strength is helping to underpin the property market, which has proved among the most resilient to the downturn.
So, even though Swiss GDP dropped in the past three quarters, few are willing to dispute that, as Manuel Jetzer, Geneva regional head at Credit Suisse, puts it: “There is no credit crunch… There is no credit contraction in Switzerland.”
In Hungary, however, where foreign currency mortgages account for 70% of all mortgages, many in Swiss francs, times are tough. Lured by low interest, some Hungarian borrowers face steep increases in their monthly payments. The Hungarian forint has lost almost a quarter of its value since March.
Back here in Switzerland, the growth of the mortgage market is something of an anomaly, especially given the country is struggling to grow. Jetzer argues the mortgage market is acting as a source of stability.
The Swiss example is unique for several reasons. First, Swiss banks have historically relied on Pfandbrief mortgage bonds for refinancing loans, a market that has experienced a renaissance since the crisis.
By contrast, banks in the UK have relied on the securitisation markets to refinance mortgage loans and those markets have remained shut throughout the crisis and are only now starting to reopen. Hence, at the lows of the crisis, the UK experienced a 20% decline in lending, according to Credit Suisse research.
Second, when banks across several other markets, most notably the UK and Ireland, were dishing out near-free credit, a credit bubble never materialised in Switzerland. As such, its lending standards remained prudent.
Most borrowers put down 20% deposits. Bank lending has been in decline in Germany, France, Spain and Italy since the onset of the crisis, and in negative territory in the UK.
Third, sustained growth in mortgage lending in Switzerland has been fuelled by low interest rates since the end of last year. The Swiss National Bank has cut interest rates to 0.25%, compared with 0.5% in the UK and 1% in the eurozone.
Finally, property prices in Switzerland have continued to rise, giving banks greater confidence to continue lending. Data from the Swiss National Bank shows prices bucked the global trend last year, rising 5.3% for single-family homes and 5.6% for owner-occupied apartments.
But while the Swiss may be emerging in good shape from this crisis, with the exception of UBS, which continues to be under pressure, the authorities have not always got policy right. In the late 1980s and early 1990s, property prices boomed in Switzerland. Rental apartments rose on average by 14% annually from 1988 to 1991, according to the Global Property Guide.
To tame runaway house price inflation, the Swiss National Bank raised interest rates. At the time most Swiss mortgages were variable, making the impact more severe. Apartment prices began a period of decline, so that by 2000 they were back to their 1987 levels, wiping out a decade’s gains, according to the Global Property Guide.
So, while times are getting tougher for those with Swiss franc mortgages overseas, the Swiss can breathe easy that they have – at least for now – avoided the worst of the credit crunch.
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