Switzerland as safe haven continues for now, but don’t count on long-term impact
ZURICH, SWITZERLAND – Current very low interest rates are not the “new norm”, Jean-Pierre Danthine cautioned in a speech to the Money Market Event in Zurich 22 March. Danthine is a member of the governing board of the Swiss National Bank.
“As most mature economies gradually return to their normal growth path – and I do not dispute the diagnosis that this demands more time after a severe financial and banking crisis than it would in more normal business cycle circumstances – one can reasonably expect real rates to return to higher levels than those observed recently. This is good news for savers and pension funds alike. It should also be taken into account by borrowers, especially long-term borrowers, such as those active in the mortgage market.
“From their perspective, it is inappropriate to consider the current low rates as representative of a so-called new normal. The intended economic stimulus provided by low interest rates will only last for a few years, not decades. It is crucial for long-term financial stability that those who make long-run debt commitments are fully aware of this reality and that they plan accordingly.”
Danthine also argues that future inflation levels “will resemble those of the last 20 years”, noting that he does not believe “the current period of central bank activism will be followed by a resurgence of inflation. First, contrary to common assertions, persistent as opposed to unanticipated inflation is limited in its capacity to reduce sovereign debt burdens. Second, the low levels of inflation we are currently experiencing are the result of improved monetary policy, combined with a general acknowledgement that inflation does not buy durable economic performance.”
Negatives in global economy behind Swiss low interest rates
Recent events have not affected either of these, Danthine points out.
Negative developments in the global economy lie behind today’s low interest rates in Switzerland, progressively increasing “the demand for ‘risk-free’ investments, while decreasing their supply,” says Danthine.
Too big to fail banks should increase capital base more quickly
BERN, SWITZERLAND – The International Monetary Fund’s annual review of the Swiss economy holds no major surprises, but the IMF did warn of the risk of fallout from eurozone crises. It was firm that the country needs to heed its three recommendations, the federal government said in a statement issued Tuesday 20 March:
- In order to counter the financial consequences of demographic developments, the IMF recommends taking measures quickly to reform the pension system; in particular it recommends a “a binding rule that would link the retirement age and pension benefits to life expectancy”
- Given the environment of persistently low interest rates, the IMF experts see a growing risk of a real estate bubble in parts of the real estate market: “Against this backdrop, it considers it advisable to swiftly introduce the countercyclical buffer proposed in the report of the “Financial stability” working group and strengthen the capital requirements for the mortgage lending business. Moreover, the IMF recommends including affordability limits in the macroprudential oversight toolkit”; for future homeowners, this translates as larger downpayments.
- Finally, the big banks should raise high-quality capital more swiftly.
Your home is your castle, but getting the mortgage to buy it might get tougher
The IMF forecast reflects those issued in recent days by the big banks and Seco, the state economy ministry: “the IMF anticipates subdued economic growth due to slower export demand. It sees an upturn in the economic outlook in the second half of the year. This is mainly due to global economic growth picking up and improved competitiveness.”
The overall note for Switzerland was positive, with the IMF finding the cap on the Swiss franc, CHF1.20 to the euro, an “appropriate policy response” although in the medium term it would like to see a freely floating currency.
The pension system will begin to feel pressure at the end of this decade, the IMF warns, and measures should be taken now to improve the situation.
“Under unchanged policies, the increase in aging-related expenditure will already start to bite in earnest around the end of this decade. Consequently, time for reform preparation and implementation is running out quickly. Specifically in the pension system, equalization of the male and female retirement age and pension indexation to inflation only (rather than both inflation and wages) could be considered. Most important, drawing from the experience of other countries, a specific “fiscal rule” that automatically links the retirement age and/or pension benefits to life expectancy could be introduced. Such a rule would reduce the need for repeated and often difficult reform discussions.”
Beware the bubble in housing hot spots
Minimum affordability ratios should be more widely used to reduce risk in the housing market, the IMF says.
“As monetary conditions loosened in 2008, housing price growth accelerated and there are signs of overheating in some ‘hot spots’ and market segments, as well as evidence of loose mortgage lending policies. Since monetary conditions are unlikely to be tightened for some time, the risk that a bubble may form is intensifying. Domestically-oriented banks (and to a more limited extent, the insurance sector) are exposed to the domestic real estate market through both credit and interest rate risk. The latter is building up as longer-term mortgages at low fixed interest rates are becoming more widespread.”
Thomas Jordan, acting chairman of the Swiss National Bank
ZURICH, SWITZERLAND – The Swiss central bank does not see any risk of inflation for Switzerland in coming months, nor any need to reduce the level of liquidity. However, distortions in the mortgage and real estate market could increase and the Swiss government will soon look at the possible need to intervene.
Thomas Jordan, vice chairman and, since Philipp Hildebrand’s resignation 9 January, interim chairman of the Swiss National Bank (SNB), was addressing the Swiss American Chamber of Commerce Tuesday 6 February in his first major policy statement since taking the reins a month ago. Jordan says the central bank is adhering to its policy of keeping a firm cap on the Swiss franc, a policy that “corrected the overvaluation of the Swiss franc to some extent”.
“Thanks to this decision, investment planning for export-oriented companies has been facilitated, and the risk of both deflation and severe structural damage to the Swiss economy has been reduced. Without this policy measure, the extreme overvaluation of the Swiss franc and its volatility would probably have persisted.”
The SNB set a minimum exchange rate of CHF1.20 per euro in early September of 2011.
A whiff of optimism, but “subdued” outlook might be best we can expect
He offered a crumb of optimism for Switzerland’s financial outlook, saying that “if the European authorities were to credibly commit to a sustainable solution soon, existing uncertainties would be reduced substantially. In such a scenario, demand for perceived safe financial assets would fall in general, and for the Swiss franc in particular”
But he emphasized that we are still living in a world with “substantial downside risks” and the picture could prove worse than today’s “subdued” economic outlook.
“Economic growth will continue to be driven by emerging markets. However, we expect growth rates in China and India – the most important countries in emerging Asia in economic terms – to remain below potential in the near term, due to prior monetary policy tightening, high inflation, and sluggish external demand. Looking at the US, recent data suggest that the situation has improved slightly. However, this should not hide the fact that economic growth in the US is likely to remain sluggish.”
He cites continuing high unemployment in the US and “the fiscal environment remains contractionary. For the euro area – Switzerland’s most important trading partner by far – the economic outlook has deteriorated since last autumn. Uncertainty about an escalation of the sovereign debt crisis is undiminished. As a result, the euro area is likely to face a mild recession in early 2012.”
Liquidity, interest rates and mortgages under debate
Jordan says the SNB’s policy has raised two questions.
“it is argued that the significant increase in liquidity since August 2011 may trigger inflation risks in the longer term. Given the current economic situation, however, expanding the supply of liquidity was a necessary monetary policy response. There is currently absolutely no risk of inflation in Switzerland. First, headline inflation turned negative in October 2011 and continued to decline through the end of the year. It is assumed to fall even further in early 2012. Second, neither our inflation forecasts nor the medium-term inflation expectations from our surveys of households and companies show any signs of inflation risks. Consequently, there is no necessity whatsoever for the SNB to reduce the level of liquidity for the time being.”
The other is the impact of long-term very low interest rates on the housing market.
“On the other hand, a long period of very low interest rates may lead to imbalances in the domestic credit and real estate markets, which may pose serious risks for financial stability. We are well aware of these risks and are analyzing them very carefully. However, due to the exceptional monetary policy situation, interest rates cannot readily be increased to address such threats. In other words, at the current juncture, monetary policy cannot react to these imbalances with conventional monetary policy instruments. Therefore, the Swiss Government is due to decide soon upon the introduction of so-called macroprudential instruments that can be used – if necessary – to mitigate potential credit and housing market distortions.”
Possible overheating in real estate: tighten mortgage requirements, gov’t told
Home sweet home in Switzerland: signs the market is overheating
BERN, SWITZERLAND – The OECD (Organization for Economic Cooperation and Development) 2012 report on Switzerland, issued this week, cautions Bern against allowing consumer debt to build and warns that the real estate market may be overheating.,
The report’s overall assessment is that while Switzerland is weathering the eurozone crisis reasonably well, it remains at risk from the ongoing sovereign debt problems and economic stagnation in the region. The high Swiss franc will continue to pose problems for the export industry, the OECD notes.
“Exceptionally low” short- and medium-term interest rates are contributing to a mortgage boom and high real estate prices, the report states. Some areas are now showing signs of overheating, the report concludes. “Taking into account the high gross debt of households, the risk could increase, for small internal market banks, if there is a sudden rise interest rates.” Household debt in Switzerland is one of the highest in the OECD, it notes, although household wealth is “not negligible” taking into account assets held by the pension system.
Other key points from the report:
- The country’s two big banks, Credit Suisse and UBS, should be required to have higher leverage ratios than the 5 percent proposed by parliament, common equity should play a greater role and the reforms passed by parliament in 2011 should be implemented more quickly than the scheduled completion date of 2019. Parliament’s capital ratio of 19 percent has been praised as going beyond Basel III requirements for banks around the world, but the size of the two big banks in relation to the Swiss economy creates a risk that remains too high;
- Fiscal reforms would encourage economic growth; these should include a higher TVA (value-added tax) with broader coverage to consolidate growth and reduce distortion in the system. At the same time, the tax rate for individuals should be lowered, the OECD recommends, to encourage growth. Switzerland’s tax rates are modest on an international scale, but this is offset by the burden of mandatory health insurance and pensions.
- A number of measures are recommended to reduce CO2 in line with agreed limits by 2020; the OECD recommends an emissions tax on vehicles, saying this is a relatively inexpensive way for the country to reduce CO2 emissions, and it suggests peak traffic and congested area use taxes.
Blackden is a boutique of Swiss-based financial advisers whose work includes expat mortgages and primary & secondary residences, pensions and taxation. Based in Versoix.
GENEVA, SWITZERLAND – You could be due for up to a 10 percent reduction in your rent if you haven’t asked for a cut since 2008, says Asloca, the Swiss tenants’ association, 1 December. It won’t come to you: you have to ask for it.
The Swiss rental reference interest rate has fallen from 2.75 to 2.50 percent, which means it can be applied to rental agreements. The rate is calculated quarterly, based on the average of banks’ mortgage rates. Today’s lower rate gives tenants the right to ask for a 2.91 percent rent reduction, but it’s the fourth since the start f 2008 and in total the reductions come to about 10 percent. The law changed in October, making it easier to apply the reference rates to real rent reductions.
Asloca says tenants are often afraid to ask for a reduction on an existing lease for fear that the landlord will try to use that to end the lease, but the opposite is true: tenants who insist on reductions because the law gives them the right to this lower rents overall in the country, and they are better protected when the landlord tries to increase the rent.
Guide to how to ask for a cut in rent, Bon a savoir (Fr)
Swiss construction and renovation is booming, thanks to low interest rates
BERN, SWITZERLAND – The current very low interest rates in Switzerland run the risk of overheating the mortgage market and Wednesday the Swiss Federal Council underscored that it considers urgent the need for measures to reinforce macroprudential management.
In particular, the government wants to ensure that the central bank and supervisory authorities have rapid access to lending data from the banks to avoid a Fannie Mae style meltdown from risky loans, with the broader impact that would have on the economy.
The Swiss National Bank and Finma, the federal supervisory body for financial institutions, are already working with the Federal Finance Department, and the working group will very soon begin to involve Swiss banks, the cabinet said in a statement 7 September.
The working group’s work is an extension of steps taken 17 August, when the government announced that banks will be required to get tougher about mortgages starting in January 2012.
Borrowers will need higher down payments to buy homes starting next year.
The group is reviewing the way in which the central bank can have rapid access to bank data when it’s not available to Finma. Current legislation may be too restrictive, the cabinet argues, and if this is found to be the case it will draw up a new legal framework by the end of the year and submit it to parliament.
“Macroprudential” is a relatively recent buzz word in the financial word, says the Bank for International Settlements, reflecting greater concern since 2008 over the impact of high risk lending on the economy as a whole. One of its earliest uses was in 1979, in a background paper prepared for a BIS working committee by the Bank of England:
“Prudential measures are primarily concerned with sound banking practice and the protection of depositors at the level of the individual bank. Much work has been done in this area – which could be described as the ‘micro-prudential’ aspect of banking supervision. […] However, this micro-prudential aspect may need to be matched by prudential considerations with a wider perspective. This ‘macro-prudential’ approach considers problems that bear upon the market as a whole as distinct from an individual bank, and which may not be obvious at the micro-prudential level.”
Background feature: “Swiss mortgage rates remain low, but market increasingly scrutinized”, 17 June 2011, GenevaLunch
New reports shed some light on Geneva housing prices
ZURICH, SWITZERLAND – The Swiss National Bank 16 June joined the chorus of cautious voices warning of real estate markets overheating in some urban areas in Switzerland and the risks a sudden sharp economic downturn, not to be excluded despite current economic growth, could pose for banks as well as property owners. The central bank has begun a quarterly survey of Swiss banks’ risk levels.
“In response to signs of imbalances developing in the Swiss mortgage market and to the high uncertainty over the banks’ true risk exposure, the SNB has intensified its monitoring of the mortgage market. For this purpose, at the beginning of 2011, it launched a comprehensive quarterly survey of banks. The survey results will be a key tool for analyzing the vulnerability of the Swiss banking sector, and assessing
the need for further policy measures.”
The carefully crafted words of the SNB’s Financial Stability Report 2011, published 16 June, don’t paint a dramatic picture, but the report does raise flags, even as luxury property reports aimed at buyers outside Switzerland, such as one issued by the New York Times 16 June, paint a rosy picture that overlooks the larger
Cheaper housing: Geneva’s Swiss are buying in Annemasse
Neighbouring France is benefitting to some extent from the high franc and housing shortage situation. Le Temps reports today that 40 percent of the new relatively low-cost housing complexes being built in Annemasse, on the border, belong to Swiss people.
The managing director of a large retail store in the Nyon area told GenevaLunch Thursday that “retailers here are suffering. It’s not catastrophic but it’s not good. We read about how well the economy is doing, but we don’t see it. People are shopping over in France, understandably, with the low euro.”
Interest rates held at low 0.25%
Geneva's old town: a nice place to live, for those who can afford it
The good news for homeowners is the SNB’s decision on interest rates, which will be kept at 0.25 percent for three months, continuing the expansionist monetary policy of the past two-plus years. The central bank notes, however, that the current situation cannot continue for another three years, with low interest rates to fuel the money supply, coupled with a high Swiss franc, in the context of a very mixed economic growth picture in Europe. “Strong growth in the emerging markets and positive developments in Germany and Switzerland contrasted with economic weakness in several other European countries”, in 2010, the report warns.
Swiss market stable except for Geneva, Lausanne region
Swiss residential real estate prices show marked differences, with Wuerst and Partner‘s October 2010 quarterly report on the Swiss market showing 60 communes at risk for real estate bubbles, while the market overall remained “stable”.
The latest report from the company, issued in May 2011, says stability has continued, with one significant exception: “residential rents are expected to continue to remain generally stable. The one exception is the Lake Geneva region: This region is currently experiencing the strongest population growth throughout Switzerland, whilst at the same time residential construction activity has remained moderate in comparison with the rest of the country. Consequently, rents in this region are expected to trend further upwards in the foreseeable future.”
The housing supply rate stabilized in the first quarter of 2011, Wuerst figures show, but the asking price for all residential property in Lausanne and Geneva continued to climb, the only area in Switzerland where this was the case.
Sales prices in Lake Geneva area rose 10% and more: CHF2.26m on average in Geneva
Bern, Switzerland (GenevaLunch) - PostFinance, the financial arm of Swiss Post, has attracted 18,000 new clients in the first three months of 2011 and its earnings are up 39 percent over Q1 in 2010, to CHF 181 million, Swiss Post announced 9 May.
Customer deposits rose by CHF5.2 billion to CHF89.4 billion. “This increase lead to improved net interest income, up by 22 percent on the same period last year, despite a consistently narrow interest margin. This is the main reason for earnings of CHF 181 million,” the Swiss post office says in a statement.
The number of new accounts increased significantly, by 48,000, nearly double the number of new accounts the previous year, in the same period.
The reality of what the budget cuts, put in place by the new coalition government in Britain, really mean is making headlines in the UK: the National Health Service and disability insurance are likely to see sharp cuts. Meanwhile, new measures agreed to by the G20 to increase bank capital requirements could mean £130 million less for banks to loan for home mortgages, writes the Telegraph.
Links to other sites: British Medical Association press release, The Scotsman
“Rental value” tax to end to simplify tax system
Maintenance fee and mortgage interest deductions also to disappear
Goms Valley, canton Valais, 16 May 2010
Bern, Switzerland (GenevaLunch) – Owners will no longer be taxed on the rental value of their property (the valeur locatif), as part of efforts to simplify the tax system, the Swiss Federal Council said Monday. Deductions allowed for property maintenance will also stop, as will interest payments on mortgages, to offset the loss in tax revenue.
The changes are part of the government’s counter-project to a popular initiative that would have reduced but not cut the rental value tax. The government asked the federal finance department to draw up a proposal, which was then opened to consultation for several weeks.
The Royal Bank of Canada has raised the interest rate on mortgages to 6.25 percent on five-year closed mortgages, the third increase in a month. RBC is the country’s largest bank and others are likely to follow, says The Globe & Mail, with the national bank saying that its key lending rate will rise in June.
Meanwhile, the prices, at least in Vancouver, are enough to raise the roof, reports McLeans.
Lausanne, Switzerland (GenevaLunch) – Regional and smaller customer banks continue to make inroads in Swiss banking, with cooperative bank Raiffeisen boosting its share of the Swiss mortgage market to 15 percent. Mortgages were up 9.1 percent, an increase of CHF9.2 billion.
The company’s 2009 financial results, announced Friday 5 March, show a strong inflow of new client money: CHF110.7b, an increase of 6.4 percent. The bank’s profit rose by 14.4 percent to CHF645.4 million.
Raiffeisen is the country’s third largest bank, after UBS and Credit Suisse, and it is steadily gained ground in recent years.
Swiss households' real estate assets, now more transparent
Zurich, Switzerland (GenevaLunch) – The net worth of Swiss households fell in 2008 from an average of CHF334,000 per capita to CHF312,000. About CHF200,000 of this is real estate and claims against insurance and pension plans. The drop in assets, the first since 2002, was due to sharp falls in stock market values. It would have been worse but for higher real estate values, which provided something of a safety net. Real estate assets, CHF1,315 billion in total, accounted for 43 percent of all household assets at the end of 2008, up from 39 percent the previous year.
Real estate prices climbed in 2008
The total value of households’ real estate rose by CHF73 billion in 2008.
The figures were released by the Swiss National Bank (SNB) Friday 20 November, as part of the national financial accounts. This is the first year that assets include households’ real estate. The report notes that:
“financial assets held by households declined by CHF199 billion (10.4%) to CHF1,718 billion, while assets held in real estate increased by CHF73 billion (5.9%) to CHF1,315 billion. Liabilities rose by CHF15 billion (2.4%) to CHF629 billion. As a result of these developments, households’ net worth fell by CHF 141 billion (5.5%) to CHF2,403 billion.”
Ireland is creating what is alternately described as a creative financial undertaking or a gamble: a national bank that will spend €54 billion to pay banks for mortgages to free up lending. The country’s property prices have fallen about 50 percent in the past 20 months and defaults on home loans are rising.
Links to other sites: Bloomberg, Irish Times, Nama
Home sweet home
Geneva, Switzerland (GenevaLunch) – Home loans, which account for 90 percent of bank credits in Switzerland, have grown by 5.2 percent in the first nine months of 2009, with the rate of increase up most strongly since March. And while the rate of growth of corporate loans is down, they, too, continue to grow.
“There is no credit crunch,” Manuel Jetzer, Geneva region head of Credit Suisse declared at the annual press conference of the Geneva Financial Centre 14 October. “There is no credit contraction in Switzerland.”
Much of the thanks for this goes to the home loan business, which is benefiting from historically low interest rates, with some banks offering new loans for as low as 1.65 percent*.
Zurich, Switzerland (GenevaLunch) - Mortgage loans in Switzerland, 40 percent of which are new construction loans, rose by 4.6 percent in July. They had been falling but began to rise after Swiss interest rates moved lower starting in November 2008, says the Swiss National Bank (SNB). Mortgage loans constitute 80 percent of all loans.
Loans other than mortgage loans fell by 1.6 percent in July, however.
St Gallen, Switzerland (GenevaLunch) – The Raffeisen cooperative banking group, Switzerland’s third largest bank, continues to attract new clients at a strong pace, the same rhythm as in 2008, CEO Pierin Vincenz, told Fribourg newspaper La Liberté in an interview. The bank in 2008 increased its funds under management by nearly 11 percent and gained 158,000 new clients, partly as a result of the legal and financial problems of Credit Suisse and UBS, the two largest banks, last year.
Lausanne, Switzerland (GenevaLunch) – Raiffeisen Bank consolidated its position as Switzerland’s third largest bank in 2008, with 158,000 new account holders and mortgages plus client deposits of more than CHF100 billion for the first time, it said in a press release Thursday 5 March.
Basel, Switzerland (romandie/afp, Fre) – Coop Bank is reducing its interest rate on new mortgages, effective immediately, to 2.625%. Existing mortgages will benefit from the change 1 April 2009.
Freddie Mac and Fannie Mae, the two big US home loan companies bailed out early in the financial crisis, say they will suspend some foreclosures, which will force people to leave their homes, until early 2009, to give people more time to work out loan deals. Reuters
Swiss National Bank, 2008
Zurich, Switzerland (GenevaLunch) – Household wealth, measured in terms of assets, grew more slowly in 2007 than in 2006, Swiss National Bank figures released this week show. Net financial assets per capita amounted to roughly
CHF171,000.
