Swiss regulator fires warning over buy-to-let property lending

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Matthew Allen
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A FINMA stress test of 18 banks found that 70% of their investment property loans were at risk if conditions deteriorate. (© Keystone / Christian Beutler)

The Swiss financial regulator has warned banks that rules on mortgage lending may be further tightened if they fail to control their appetite for dishing out real estate credit. Loans tipped the one trillion franc mark in 2017 and continue to swell, particularly in the buy-to-let market.

At its annual media conference on Thursday, the Swiss Financial Market Supervisory Authority (FINMA) turned its attention to a trend of investors putting their money into bricks and mortar, with the support of banks.

A stress test carried out by FINMA late last year on 18 banks showed worrying signs of what might happen once rock bottom interest rates start to rise. Such an event would increase the burden on investors paying back loans and likely have a negative impact on the value of the properties they own. This could lead to defaults on loans issued by banks.

FINMA director Mark Branson said he is determined to avoid the type of financial crisis that Switzerland experienced in the 1990s when the housing market collapsed. “The mortgage market is critical to the stability of the Swiss financial centre,” he said. “It is too big to fail.”

Regulatory measures

The volume of mortgage loans in Switzerland has doubled in the last 15 years, and by 45% in the last decade since the global financial crisis, FINMA said. At the same time, 70,000 homes stood empty in mid-2018, realising no rental income. Branson said this represented a “ghost town” the size of the Swiss capital Bern, which “greatly increases the risk of price corrections and loan defaults.”

In response to initial fears of a house price bubble in 2012, Swiss banks agreed to a set of voluntary restrictions on property lendingexternal link.

But the government also tightened regulations, allowing the central bank to demand that commercial banks put aside extra capital as a countercyclical bufferexternal link against the rising loan pool.

Branson invited banks to toughen up their self-regulatory measures in relation to the buy-to-let market. “The alternative would be to raise capital requirements for investment property,” he warned.