Trends in the real estate market

The risks that had built up in the real estate market as a result of the developments in recent years were amplified due to the impacts of the coronavirus crisis. Occupier and investor markets continued to diverge, particularly in the area of residential investment property financing.

Due to the persistent low interest rate environment, investors increasingly sought out higher-yielding investments. Hence, they invested in residential investment properties, despite rising vacancy rates and falling rents. At the end of 2020, it was apparent that the effect of the low interest rate environment on the real estate market had, until then, been greater than that of the economic downturn. Consequently, the cooling of the real estate market that had been expected at the start of the coronavirus crisis has not yet materialised. Vacancy rates rose moderately until mid-2020, at which point 78,800 residential units in Switzerland were vacant. These high vacancy rates exerted downward pressure on residential investment property prices. This led to an increased risk that property values would fall sharply in the event of a rise in interest rates and that loan-to-value guidelines for debt financing would be breached. This would, in turn, have an adverse impact on the capital adequacy of lenders. In the office and retail premises segment, weakening demand increased downward pressure on prices. In view of the above, the deactivation of the countercyclical capital buffer by the Federal Council in March 2020 should not be perceived as an all-clear signal, but rather as a short-term countercyclical capital measure to cushion uncertainty about further economic developments.

Due to the heightened risk in relation to investment properties, FINMA has been advocating stricter lending criteria in this segment for several years. In 2019, it recognised the correspondingly adjusted Swiss Bankers Association guidelines as a new minimum standard under supervisory law. These stricter criteria entered into force on 1 January 2020 and, with respect to investment property financing, they require borrowers to contribute a higher share from their own funds and stipulate a shorter repayment period. During the year under review, FINMA closely monitored compliance with these stricter standards and their effects on mortgage lending. In doing so, it focused particularly on the buy-to-let financing sub-segment, which was not explicitly brought within the scope of the stricter self-regulation requirements. FINMA also utilised its regular supervisory instruments, such as on-site supervisory reviews and stress tests, to identify elevated risks affecting individual supervised institutions in connection with the real estate and mortgage market and take appropriate measures to reduce these risks.

(From the Annual Report 2020)