In fact, no one wants to be at the top of this ranking: Geneva and Zurich are among the international leaders when it comes to the risk of a real estate bubble. This is demonstrated by the UBS Bubble Index released this week. In the Zurich region, house prices have increased by 20 percent since the beginning of 2020 alone.
If such a bubble bursts, it could have deadly consequences for homeowners: real estate prices fall until banks eventually run out of equivalent value for the mortgages issued. With such a shortfall, banks can demand additional payments from homeowners who pour properly.
Things can quickly get tight as many people go to the brink of financial pain when buying their own home. A simple example: Someone buys an apartment for one million francs and finances 80 percent with a bank loan. If the price of the property falls by 20 percent to 800,000 francs, the debt increases by 100 percent. As a result, the owner would have to add 160,000 CHF.
The risks are higher in the center
So should property owners in Geneva and Zurich be worried about the rising risk of bubbles? Katharina Hofer (35), economist at UBS and co-author of the study, said: “We currently expect a significant cooling in the domestic market compared to the strong price increase during the pandemic, but with nominal prices falling sharply, there is no correction.”
Years of negative interest rates meant more people were buying their own homes. This has caused house prices to rise much faster than rents. Also, prices in downtown Zurich have increased more than agglomeration. “Therefore, the risk of bubbles in agglomeration is quite low,” says Hofer.
Economic crisis as a possible loot
The economist expects the imbalances in the market to decrease before prices fall. The Zurich real estate market benefits from the strong economy in the region. Immigration is still high and property demand is significantly higher than supply. According to Hofer, a lot has to happen for prices to fall: “Nominal prices will only fall in the event of a serious recession and job security collapses – but we’re not assuming that at the moment.”
Simon Hurst, 35, of real estate consulting firm IAZI, also thinks it’s unlikely that homeowners will have to deposit money in their banks: “Prices will have to come down drastically for that, and that’s unrealistic right now.”
Investment properties come under pressure faster
In addition, according to Hurst, mortgage regulations will provide additional security for financial institutions: “Anyone who buys their own home with very little equity has a depreciation obligation in the first 15 years so that the loan-to-value ratio is no more than 80 percent of the property value during that period. It could drop from . And banks will have an interest in ensuring that mortgages continue to function as safely as before. “Therefore, only individual cases should be affected when prices fall.”
But Hurst takes a different view when it comes to leveraged investment properties: “If there’s a sharp price correction combined with rising interest rates, investors quickly have a problem. Then the rental income is no longer sufficient for the interest payments and the equity disappears.”
However, as immigration is expected to be high in Switzerland next year, according to forecasts, prices at property points are expected to continue to rise slightly.