Significant risks in the real estate and mortgage market: supervisory activities focus on lending criteria and highly exposed institutions

The largest annual price increase, measuring 8.5%, was recorded in the detached housing segment during the first quarter of 2022. Price falls similar to those in other countries (e.g. Sweden) have not so far been observed within this segment in Switzerland. However, price momentum slowed to 6.5% per annum towards the end of the third quarter. Higher mortgage interest rates, and thus higher costs for private homes, may impact more strongly upon demand and price trends over the medium term. Following a period of stagnation during 2020, buy-to-let property prices also started rising again from the second quarter of 2021 onwards. As of the third quarter of 2022, prices had risen by 6.0%.

Due to a volume expansion of 3.1%, the growth rate for mortgages issued by banks remained stable compared to 2021. With the upward movement in mortgage interest rates, a noticeable increase was observed in the level of demand for variable rate mortgages. In the case of domestic mortgages, the banks maintained their market share of approximately 94%. The market share held by insurance companies sank further, i.e. to less than 3.5%. FINMA once again identified increased affordability risks associated with the granting of new mortgages, particularly in the residential buy-to-let property sector.

In 2022, FINMA maintained its assessment that a potential correction in the real estate and mortgage market was one of seven top risks for the financial centre. It paid particular attention to institutions whose growth depended substantially on collaborations with credit intermediaries. Similarly, in order to identify outlier institutions, large mortgage banks were subjected to mortgage stress tests on the one hand, and to benchmarking with respect to lending criteria on the other. In response to the individual risk situation and the risk appetite for mortgage loans, mitigating measures were implemented at the relevant institutions. This included ordering capital addons, or recommendations to adjust lending criteria or adjustment or cancellation of existing increases in cases where the risk situation was diminishing.

FINMA favours the risk-differentiated capital requirements for mortgages that were finally stipulated in the Capital Adequacy Ordinance (CAO) following the entry into force of the corresponding provisions of Basel III. More specifically, the capital requirements for mortgages will, from now on, depend to a greater extent on the type of use and the loan-to-value ratio of the underlying real estate. However, even in the future, the affordability risks will still not be taken into account to any significant extent for the purposes of determining the capital requirements for mortgages. FINMA will therefore continue to monitor the trend in affordability risks very closely.

(From the Annual Report 2022)