The rise in real estate prices in Switzerland over the past 20 years has been considerable, as it has in other countries. This development was mainly driven by the historically low interest rates prevailing for over a decade. Low interest rates reduce interest costs for mortgage loans and make it more attractive to own a home than to rent. It is also likely that increased income levels, the desire for more living space, and population growth contributed to demand for real estate rising more strongly than supply.

Why can rising real estate prices entail risks for the financial system?

Rising real estate prices become problematic when their increase is significantly stronger than can be explained by fundamental factors such as income or population growth. This increases the danger of price corrections, and with it the risk to the financial system.

Experiences in Switzerland and abroad have shown that significant turbulence on the real estate market can jeopardise financial stability and affect the economy as a whole. One trigger, for instance, might be an abrupt interest rate hike, which can make it difficult for many households to afford their mortgage payments. When a debtor defaults and the value of their home drops below that of their mortgage, the result is a loss for the lending bank. So a real estate crisis may affect not only private households but also the financial system and, ultimately, the whole economy.

At the end of the 1980s, inflation was on the rise in Switzerland and the SNB had to tighten its monetary policy significantly. Mortgage rates then went up, while at the same time the economy weakened – and the value of real estate tumbled. This led to losses in mortgage lending for the banks, especially the regional banks and some cantonal banks. In October 1991, for example, the Spar- und Leihkasse Thun had to close its doors following a bank run by customers afraid of losing their savings.

What steps does the SNB take?

The SNB is required by law to contribute to the stability of the financial system. This is because a stable financial system is an important prerequisite for a well-functioning economy and an effective monetary policy.

To mitigate risk, the SNB calls attention to the banking system taking on too much risk, and recommends precautionary measures in good time. It does this through a variety of channels, such as its Financial Stability Report.

Aside from communication, the SNB has no other instruments of its own in this area – rather, it coordinates its activities with federal authorities.

Thus for example, the SNB can propose the activation, adjustment or deactivation of the countercyclical capital buffer (CCyB) to the Federal Council. It has taken advantage of this prerogative on various occasions over the past decade, most recently in 2022, when the SNB submitted a proposal to the Federal Council requesting the reactivation of the CCyB. The Federal Council approved the proposal, which obliges the banks to hold more capital backing for each mortgage loan on residential real estate. This strengthens the capital buffer, and with it the resilience of the financial system.