Risk levels associated with real estate and mortgages remain high (2024)

The reductions in interest rates by the central banks brought an end to the period of rising interest rates, and the costs of financing mortgage loans fell further, stimulating demand for real estate. During the year under review, the mortgage market had yet to show a strong response, and the growth rate in mortgage loans remained moderate.

Prices of owner-occupied residential properties began to slowly rise again. Demand also increased in the residential buy-to-let market, although less markedly than in the negative interest rate environment. Alongside the interest rate cuts, the positive economic trend, further growth in the Swiss residential population, and continuing low levels of construction activity contributed towards the rise in real estate prices. Overheating risks in the Swiss real estate market remained high in 2024.

FINMA paid close attention to the situations of financial institutions that are heavily invested in the investment property segment. This was primarily on account of structural developments in relation to investment properties and the forward indicators of possible market responses. FINMA carried out on-site supervisory reviews, stress tests and data analyses. The latter were performed in respect of 45 banks and insurance companies. The findings showed that the valuation models used by the institutions had room for improvement in terms of the way in which they are used, and the periodic validations that are performed on those models.

FINMA observed, once again, that the criteria for the affordability calculation varied significantly from institution to institution. In the course of its on-site supervisory reviews and in the context of its general supervisory activities, FINMA found that various institutions were tending to overestimate their borrowers’ creditworthiness and that many banks were granting an excessively high proportion of their loans as “exceptions to policy”, i.e. loans that are outside their own lending criteria.

Depending on the developments in the risk levels, FINMA considered regulatory changes, such as the consistent application of rules when calculating affordability. In the case of banks with exposure to major risks – which, for example, were lacking in sufficient loss-absorbing equity capital – it ordered equity capital increases, among other measures.

(From the Annual Report 2024)