By Eric Roseman
Dear Sovereign Investor,
Low interest rates, strong demand for housing – coupled with the conviction of potential buyers that real estate investments are not a risk – are the perfect ingredients for a bubble.
This story is currently playing out in Switzerland’s real estate market.
A potential real estate bubble remains a top concern as Swiss mortgage credits expand at a fast pace, resulting in continuously elevated price increases.
What does the Swiss real estate bubble mean for you?
It’s important to underline what’s happening in Swiss property because so many offshore investors hold the Swiss franc.
Today, the Swiss franc remains strong. After the Norwegian kroner, it is the healthiest currency in Europe based on trade and budget surpluses, and reduced foreign debt obligations.
More than any other currency beyond the U.S. dollar, the Swiss franc plays an important role in most offshore portfolios and foreign accounts as a long-term store of value. And any anomalies in Swiss assets – including real estate – could impact domestic capital markets.
So while Swiss real estate isn’t a good deal right now, the real opportunity is in Swiss equities.
The Bubble in Swiss Credit
Since early 2009, the Swiss National Bank (SNB), famous for its conservative state of financial affairs and the Father of the mighty Swiss franc, has been the bastion of rapid credit acceleration. As a result of cheap money, it’s also fostering a bubble in real estate as Swiss short-term interest rates remain around 0.40%; mortgages can be had at around 2% or less.
Over the past 12 months, Swiss National Bank assets have ballooned by 35.9% while growing more than 50% alone over the past six months, according to Grant’s Interest Rate Observer. Over the past three months, Swiss bank credit has mushroomed by 29.4%.
What’s amazing is that all three reporting periods rank as the biggest growth in central bank credit among the largest central banks in the Western world. Even more amazing is how this can happen to such a conservative central bank.
Blame it on the credit crisis.
Swiss-Style Quantitative Easing
Starting in March 2009, the SNB began to aggressively purchase EUR in order to maintain export competitiveness and depress the value of the surging franc. That’s when the SNB launched its own version of Quantitative Easing or QE, buying back Swiss government bonds and ballooning its balance-sheet with government securities and a truckload of Euros.
But is also looks like the Swiss borrowed from the United States and embarked on a real estate credit binge over the past few years.
Low real interest rates have already fueled big bull market bubbles in Western real estate over the last decade with dire economic consequences once they collapse. And collapse they always do.
Real Estate on Steroids
Swiss real estate, always steady and always as solid as the currency it’s denominated in, has started to take-off in several Cantons around Zurich.
A close friend of mine in Switzerland is already active since 2007 in Swiss residential real estate and calls the cost of Swiss money “exceptionally cheap financing.”
I suppose others think the same and have started to buy whatever supply is left in a market that’s traditionally been very tight. Yet super low rates combined with low vacancy rates of under 1% in Zurich can only mean one thing – higher prices.
According to Zillow.com, Swiss residential real estate prices have surged 22.9% over the last 12 months. Throw in some leverage and cheap financing and you’ve got a superb speculation on steroids.
For now, the party continues in some of the hottest real estate markets in Switzerland.
Low rates usually mean only one outcome: Speculation with a bad ending once the music stops.
But there is an Alternative for Investors
Swiss real estate isn’t a great franc-denominated investment right now – at least in most areas that have already appreciated.
But, the Swiss SMI Index in Zurich offers great bargains supported by the highest interest rates compared to bonds and money-markets in decades. And that’s where the value is.
The reason for this is that many large-cap Swiss stocks, like two of the open positions in The Sovereign Individual Portfolio – a best-of-breed global pharma player and the world’s largest food company – pay dividends far in excess of Swiss benchmark government bonds.
Swiss equities have trailed other European averages in 2010 and that makes them attractive since a strong franc has crimped some exporters.
Overall, the stock market is extremely attractively valued and provides long-term investors a good entry point with low multiples and high dividends in one of the world’s strongest currencies.
I’ll take large-cap Swiss stocks any day compared to most residential Swiss properties. Bargains beckon in Zurich stocks.
Editor, Commodity Trend Alert