Mortgage and real estate markets: Current developments pose risks to financial stability

Fritz Zurbrügg, Vice Chairman of the Governing Board

University of Lucerne, Lucerne, 31.08.2021

In Switzerland, mortgage lending and residential real estate prices have increased significantly in recent years. The Swiss National Bank monitors these developments very closely, as mortgage and real estate markets play a key role in the banking sector and are thus very important for overall financial stability. Upheavals on these markets in the past have repeatedly triggered chain reactions with a negative impact not only on the banking system, but also on the economy as a whole.

As its mandate requires it to contribute to financial stability, the SNB is committed to identifying risks at an early stage and containing their growth, as well as to strengthening banks' resilience. To fulfil its mandate, the SNB communicates its assessments and recommendations to the general public, participates in designing the Swiss regulatory framework, and regularly examines whether the level of the countercyclical capital buffer is appropriate.

Currently, a broad range of indicators suggest that residential property prices and mortgage volume have risen more sharply in recent years than can be explained by fundamental factors, such as economic growth. Moreover, credit risks in connection with newly granted mortgage loans, particularly affordability risks, have increased substantially over the past few years. Against this backdrop, the SNB currently considers the vulnerabilities on the mortgage and real estate markets to be high. According to its assessments, markets today are more vulnerable to the risks of declining prices and increasing loan defaults. Thanks to substantial capital buffers, however, most banks should be capable of absorbing any associated losses. These capital buffers are therefore essential for financial stability.

The current low interest rate environment is expected to persist, and with it the incentives for greater risk-taking. This means that risks to financial stability are likely to remain in the spotlight. Containing these risks will continue to require the participation and support of all market players: the authorities, the lenders, and the borrowers.