Housing: Corona crisis sends bubble index soaring

The index increased from 1.30 points in the first quarter of 2020 to 1.52 index points in the second quarter. In the following quarter, the real estate bubble index will even jump marginally into the bubble zone, according to UBS's forecast.

In addition to falling incomes in the sharp recession, higher home prices would also contribute to the significant increase. Adjusted for inflation, home prices climbed nearly 4% in the second quarter from a year earlier. That's the largest increase since 2013, UBS researchers write.

Although the Swiss economy experienced the sharpest downturn in the last 40 years in the first half of the year, a strong recovery is expected in the second half. According to UBS, this means that the model-based estimate of the real estate bubble risk for the Swiss residential property market fluctuates widely.

UBS expects the index level to return to the Corona pandemic level by the end of 2021, even without a correction in home prices. However, the researchers assume that income per household at the end of 2021 will be almost on par with the end of 2019, that the rate of increase in home prices will moderate, and that rents will continue to fall slightly. Mortgage volume growth is expected to slow slightly compared with 2019.

Thus, the Corona crisis is likely to drive up the imbalances on the owner-occupied housing market only temporarily. Nevertheless, the UBS experts emphasize that the high prices on the Swiss owner-occupied housing market are not compatible with a prolonged crisis mode in the economy. Sustained price increases on the current scale would not be sustainable in view of falling incomes.

The Bubble Index continues to see the strongest regional imbalances in terms of the price-income ratio, the price-rent ratio and the long-term price trend for owner-occupied homes in Lake Zurich, Lausanne and Basel-Stadt.