Dossier on the mortgage market

The credit risk associated with mortgage loans has grown in importance in recent years, as on the one hand affordability risks for newly granted mortgages increased and, on the other, fundamentals point towards an overheating of the real estate market.

The substantial risks in the mortgage and real estate markets were further accentuated as a result of the price increases during 2021. The strong demand seen in the tenant market – also during the coronavirus pandemic – at least helped to ward off further increases in the risks faced by the residential investment property sub-market.

The real estate market has proved resilient in the face of the coronavirus pandemic, not least thanks to government support packages and monetary policy interventions. Indeed, mortgage volumes have actually increased further. The investment property sub-market shows indications of overheating, while investor and user markets have diverged in recent years. By contrast, vacancies have declined over the last year. However, this does not change the general risk appraisal. Price growth has accelerated further in the owner-occupied housing market, with property prices having increasingly decoupled from income development.

The risks that had built up in the real estate market as a result of the developments in recent years were amplified due to the impacts of the coronavirus crisis. Occupier and investor markets continued to diverge, particularly in the area of residential investment property financing.

Vacancy rates for residential investment properties, which have risen further owing to the corona pandemic, increase the level of risk in the Swiss real estate and mortgage market. Lost earnings from the rental of commercial and office property and flagging demand for office and retail space are pushing down prices in the commercial real estate segment. Moreover, growth in mortgages was more robust than expected this year

FINMA has repeatedly emphasised the growth of mortgage market risks in recent years. The reporting year was no different as FINMA drew attention to the ongoing growth of these risks, for example at the annual media conference of 4 April 2019, where the results of the 2018 extended mortgage stress test covering 18 banks were disclosed, and in its December Risk Monitor. The latter report highlighted investment properties, which merit a closer supervisory focus as they are particularly exposed, not least due to unprecedented vacancy levels.

The sharp rise in vacancy rates for investment properties, combined with the ongoing boom in construction activity, is exacerbating the risks in the Swiss real estate and mortgage market. Previous crises have shown that financial institutions which expand their activity in the late phase of an economic cycle are particularly exposed to the risks of an ensuing economic downturn.

The strong vacancy growth in residential investment properties and the sustained high level of construction have increased Swiss real estate market risks. Previous crises have shown that those institutions assuming risk at a late stage in the cycle are the most exposed to an economic downturn.

Persistently low interest rates also mean that investors still face a dearth of supposedly low-risk return opportunities, and investing in real estate therefore remains attractive.

Momentum in the Swiss mortgage market eased slightly in 2016, especially where owner-occupied residential properties were concerned.

In the low interest rate environment, monitoring and managing interest rate risks remains extremely important.

Price growth slowed slightly following the increase in the countercyclical buffer and the somewhat stricter rules on amortisation and central parameters of self-regulation. However, imbalances and the factors driving them persist.

Despite self-regulatory measures and the countercyclical capital buffer, real estate prices and mortgage volumes once again rose in 2013 – somewhat more slowly than before, but still faster than gross domestic product. Excessively slow amortisation and, in some cases, poor financial sustainability of mortgages and investment properties are giving rise to risks.