UBS: Bubble Index on the rise

Compared to the previous quarter, the index rose noticeably by 0.07 points. According to UBS, the strongest driver of the bubble index for residential real estate was the increase in outstanding mortgage loans for households, which rose by 3.2 percent compared to the previous year. Although the growth rate slowed compared to the previous quarter and reached its lowest level since 2008, this was the strongest growth in the last five years compared to income growth. This is because the disposable income of households is likely to have shrunk by around 0.5% in 2015.

In addition, home prices continued to support the bubble index. Prices only rose by 0.5% in nominal terms compared to the previous quarter and by around 2% compared to the previous year. Adjusted for inflation, however, the growth rate was almost one percentage point higher than the average price increases of the last two years.

Price increases for owner-occupied homes shifted from the centers to the periphery in 2015. Eastern Switzerland came out on top with extremely high price growth rates of between four and six percent. In addition, Lugano was reclassified as a risk region and Baden as a monitoring region following above-average price increases.

However, UBS has given the all-clear for tourist regions where oversupply and the strong franc have put pressure on home prices. Davos and the Upper Engadine were downgraded from danger regions to monitoring regions in view of the price declines.

The UBS Swiss Real Estate Bubble Index is made up of six sub-indices: Ratio of purchase prices to rental prices, ratio of house prices to household income, ratio of house prices to inflation, ratio of mortgage debt to income, ratio of construction activity to gross domestic product (GDP), and ratio of loan applications submitted for properties intended for rental to total loan applications from UBS private clients. (ah)