John Revill

ZURICH, (Reuters) – Switzerland’s property market has made it more vulnerable to a shock, Fritz Zurbruegg from Swiss National Bank said Tuesday. He added that it was not the role of monetary policy, to limit the risks.

According to the SNB, Swiss apartment prices are currently overvalued by between 10% and 35% due to high interest rates and limited supply.

Zurbruegg spoke in Geneva, stating that “in Switzerland, vulnerabilities have increased in the residential realty and mortgage markets since the onset the pandemic.”

“In addition, there have been an increase in affordability risk over the past few years.”

Zurbruegg stated that a sudden drop in house prices can eventually result in loan defaults and bank losses, as well as tightening credit for the real economy which could cause an economic downturn.

While the SNB has maintained its low-interest policy, central banks around the world are increasing interest rates to counter inflation.

Zurbruegg indicated that global interest rates are likely to stay low. This is due to demographics, inequalities, and strong demand for assets.

“Monetary policies have no impact on these variables. Furthermore, he stated that the main objective of monetary policies is to maintain price stability, economic growth, and reduce financial system vulnerabilities.

Zurbruegg stated that tools such as making banks have more capital to pay for property loans are better options to increase the sector’s resilience.

Switzerland’s counter-cyclical capital buffer was activated in January. This is to help lenders absorb losses if prices for property fall.

Zurbruegg declared, “Going ahead, this resilience should be maintained.”