Persistently low interest rates also mean that investors still face a dearth of supposedly low-risk return opportunities, and investing in real estate therefore remains attractive. Continuing growth in the prices of residential investment properties may lead to a pronounced imbalance, as rents fall and vacancy rates rise while prices go up. Construction activity remains brisk, leading to oversupply that cannot be absorbed in a situation of slightly falling net immigration. These developments are making residential investment properties – already a category with a high level of risk – even riskier for banks. Against this backdrop, it is very important for banks to monitor and actively manage their mortgage portfolios. Increasingly, private individuals are acquiring owner-occupied apartments as an investment and immediately letting them out. This heightens owners’ risk as vacancy rates rise and – subject to the degree of borrowing – ultimately increases the default risk for lending banks. FINMA will continue to monitor developments in the mortgage market closely. There is also an oversupply of office premises, and vacancy rates are high; however, rents have fallen, and prices are also expected to do so. Overall, there may be signs of rising demand for office space, as unemployment fell year on year in 2017 and the number of unfilled positions also increased.
The mortgage market is of enormous size and importance to Switzerland. Its volume significantly exceeds the country’s annual economic output. Strict lending standards are therefore vital. Growth at the expense of sustainable lending could jeopardise the stability of the banking system in the event of abrupt price corrections, as historical experience both in Switzerland and elsewhere has shown. FINMA is opposed to any relaxation of affordability standards. If banks systematically deviate from the Swiss Bankers Association (SBA) guidelines or employ less stringent affordability calculations for individual products or client groups that are not based on a sustainable imputed interest rate, they will no longer meet the strict prudential criteria of the Basel minimum standard. Such mortgages need to be underpinned by higher levels of equity. Only one imputed interest rate may be set for each property category (for example as defined in the SBA guidelines), and this can be based on long-term averages. FINMA considers that frequent adjustments (quarterly, for example) to the imputed interest rate do not comply with the SBA guidelines. As the effective conversion rates applied by pension funds decline, lenders must also pay due attention to long-term affordability once the borrower retires. The systematic affordability calculation must in all cases be based on the borrower’s actual debt and income situation at the start of the credit relationship. Credit may be granted under an exception to policy (ETP) where there are good reasons for doing so, but such financing must be categorised, measured and reported in terms of affordability, loan-to-value ratio and amortisation. Monitoring ETP trends over time is a key task of the board of directors.
(From the Annual Report 2017)