Few signs have emerged that Switzerland's buoyant housing market is likely to crash soon, even though the country's central bank continues to warn that residential property prices are overheating.
Swiss condominium prices have risen an average of around 35% over the past five years, according to
UBS UBSN.VX -4.39% AG. The values of some condos along Lake Geneva have jumped even faster, surging roughly 70% over the period. No data on the broad residential market is collected.
The fast clip has fueled talk of a housing bubble, particularly at the Swiss National Bank. Last month, SNB President Thomas Jordan noted that "imbalances in the residential mortgage and real estate markets increased further last quarter," the latest in a string of cautionary comments over the past two years. This month, ratings firm Standard & Poor's lowered its outlook on nine Swiss regional banks that focus on mortgage lending because of the trend in the real estate sector.
Analysts say the bubble talk is understandable, but contend housing prices are a reflection of Switzerland's strengths: a resilient economy, ultralow interest rates and wealthy migrants arriving in the Alpine country in numbers. They also point out that the sharpest jumps are confined to major cities, like Zurich, the banking capital.
"There have certainly been exaggerated property price rises in some urban hot spots, like Geneva and Zurich, and some tourist resorts, like St. Moritz," said Robert Weinert, an analyst at property consultants Wuest & Partner. Those rises, however, are tempered by flat or declining prices in rural and central cantons, he said.
Property bubbles, which are hard to define and often identified only after they have burst, worry economists and investors because of the havoc they can wreak when they burst. Collapses in property prices, which are usually prompted by central banks lifting interest rates, can leave banking systems littered with dud mortgages and choke off consumption.
"Real estate was the main culprit behind the last six major banking crises in the developed world," said Claudio Saputelli, head of global real estate research at UBS. Mr. Saputelli pointed to Spain in 1970s, Japan in the 1990s and the U.S. today.
UBS's quarterly Bubble Index hovers just below the risk threshold, but well below the all-time high reached in the early 1990s, when the Swiss property market last peaked. Mr. Saputelli said the index, which tracks the relationship between house prices and income, inflation, mortgage debt and gross domestic product, would likely move into the bubble formation stage soon, but that prices might simply stabilize at a high level.
A survey earlier this year by consultancy Ernst & Young found European investors regard Switzerland as one of the continent's most attractive real estate locations, with the strong currency and mortgage rates below 2%. Many European investors, who are worried by the sliding euro, are using Swiss property as a way to store money in an appreciating currency.
Moreover, the percentage of Swiss who own their own homes is at only 39%, below all 27 members of the EU, according to official data. Many Swiss want to take advantage of low interest rates to buy homes, a trend analysts say will likely support housing prices over the near term.
Real estate prices are also on the rise in neighboring Germany, which has a similarly low owner-occupier rate of 43%. Average German rent and residential prices climbed 4.7% in 2011, according to real estate consultancy BulwienGesa AG. While that is the fastest rate in almost two decades, it remains well below the average Swiss rate of around 7%.
Investors in Swiss multifamily homes, like apartment buildings, earned 7.8% last year as rent and property values rose, according to Wuest & Partner. That made property a better investment than Swiss shares; the Swiss Market Index, the country's blue-chip equity index, fell by roughly the same magnitude over the year.
The rise hasn't been limited to residential properties. A host of new developments, including the 126-meter-tall Prime Tower, Zurich's first glass-clad skyscraper, and a luxury resort in the Alpine town of Andermatt, are among the prestige projects under construction.
Overall, prices for Swiss single-family houses, apartments and commercial property gained roughly 2% to 3% per year since 2008, according to Wuest & Partner.
To be sure, an influx of foreigners taking well paid jobs in the banking and IT sectors has put huge strains on prime real estate in cities like Zurich. Cash-rich foreigners, including Russians and citizens from former Soviet republics, have paid hefty prices for luxury properties in low-tax cantons, like Zug in central Switzerland, and in French-speaking cities, such as Lausanne and Geneva.
Two years ago, Lola Karimova-Tillyaeva, daughter of Uzbekistan's autocratic leader Islam Karimov, reportedly paid 43.4 million Swiss francs ($43.9 million) for a villa in the exclusive Geneva suburb of Vandoeuvres, according to Swiss media reports. Prices paid for detached houses in Geneva rose 6.5% on the year in the second quarter, pushing average prices in the canton to around 2.2 million francs, or around $2.3 million, according to Wuest data.
But analysts say effects of such purchases are limited.
"Some of the prices being paid are silly," said Basel-based Riccardo Boscardin, head of Global Real Estate Switzerland at UBS. But these are isolated occurrences in the residential market, he said, and commercial property prices are much steadier.
Already, there is evidence that the rise in prices is starting to slow, suggesting the central bank's warnings are having an impact.
The latest quarterly index compiled by IAZI AG showed the average rate of price gains for detached houses slowing to 1.6% in the second quarter from 5.5% in the three months through March.
"Given the ongoing low interest-rate climate, this can only suggest Swiss house buyers are starting to become more cautious," said IAZI chief executive Donato Scognamiglio. Persistent warnings that buyers cannot rely on low interest rates forever are "perhaps now starting to have an effect," he said.
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