The unintended consequences from massive currency interventions conducted by the Swiss National bank, designed to curb huge inflows from a capital diaspora in the Eurozone by putting a ceiling on the euro, has apparently spawned a monster property bubble.
From Bloomberg,
Thomas Jordan’s fight to protect the Swiss economy is set to widen beyond currency markets and too- big-to fail risks as the central bank chairman considers how to curb the biggest real-estate boom in two decades.
The Swiss National Bank may act to stem what it called risks from “excessive credit growth,” economists from Bank Sarasin to UniCredit Group said. An option available to the central bank would be to force lenders to hold additional capital of as much as 2.5 percent of their domestic risk- weighted assets to help buffer against losses.
The SNB has already put a cap on the franc to counter the currency’s ascent and protect the economy. After leading efforts to boost capital requirements for UBS AG (UBSN) and Credit Suisse Group AG (CSGN), the country’s two largest banks, Jordan is now turning his focus to smaller lenders as the risk of a significant drop in property prices increases.
“The SNB has been warning for quite a while of a real- estate bubble and it wants to see a cooling,” said Andreas Venditti, a senior analyst at Zuercher Kantonalbank in Zurich. “It’s very possible that the buffer will be implemented before the end of the year.”
In the SNB’s June Financial Stability Report, which also called on Credit Suisse, Switzerland’s second-largest bank, to boost its capital, the central bank said the mortgage market poses a significant risk to Swiss lenders. Home loans have increased by almost 300 billion francs ($307 billion) in a decade and gained 5.2 percent last year to 797.8 billion francs. That’s about 140 percent of Swiss gross domestic product.
Surging Prices
The cost of owner-occupied apartments with as many as five rooms has risen the most over the past 10 years, with prices jumping 40 percent, SNB data shows. Prices of rental apartments have increased 29 percent.
UBS and Credit Suisse had combined outstanding mortgages of 240.6 billion francs at the end of 2011, up 2.8 percent from the previous year. Cantonal banks, which are largely owned by the regions, had a 6 percent increase, while the cooperative-based Raiffeisen banks saw mortgages surge 7.4 percent.
UBS said on July 31 that if property values fell by 20 percent, 99.7 percent of its exposure to Swiss real estate would remain covered by collateral. While prices are still climbing in some regions, “at this time, we don’t believe this could destabilize the Swiss economy or cause major losses for UBS,” Chief Financial Officer Tom Naratil said.
Chart courtesy of La Chronique de Crottaz Finance
To what extent has the SNB expanded their balance sheet?
Here’s the Financial Times,
Foreign exchange reserves rose to SFr406bn ($419.7bn) last month, up from SFr365bn in June, marking the third consecutive month that the Swiss National Bank has been forced to add tens of billions to its balance sheet in its efforts to weaken the Swiss currency.
The SNB has had a policy of keeping the franc at a ceiling against the euro of SFr1.20 since September and has vowed to buy as many euros as necessary to prevent the franc from strengthening beyond that level.
Recent interventions in the forex market have seen the SNB’s balance sheet expand to record levels. Forex reserves have risen 71 per cent since April, the latest figures show.
The credit boom seems to have percolated into the stock market too.
As of yesterday the Swiss Market Index has returned 9% and about 29% from the trough last August or about a year ago.
And considering that the growth of SNB’s balance sheet has vastly outpaced the the US Federal Reserve and other major central banks, the Swiss franc has even weakened substantially against the US dollar.
Taking cue from the Great Depression, the distinguished dean of Austrian economics Murray N. Rothbard wrote,
The trouble did not lie with particular credit on particular markets (such as stock or real estate); the boom in the stock and real estate markets reflected Mises's trade cycle: a disproportionate boom in the prices of titles to capital goods, caused by the increase in money supply attendant upon bank credit expansion
Yet if the SNB succeeds to restrain the banking system’s unsustainable credit expansion then a bust should be expected.
The boom-bust (Austrian Business) cycle as explained by the great Professor Ludwig von Mises,
But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.
In a fiat money central banking standard, boom bust cycles have been the dominant landscape.
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