But how can this potentially damaging link between the mortgage and real estate markets, the banking system and financial stability be explained? First, it is important to remember that these markets represent a major concentration of risks, especially for banks and households. Thus, mortgage claims in Switzerland are the biggest asset item on banks’ balance sheets. They account for roughly 30% of total assets in the banking system – and if one considers only the domestically focused banks that operate predominantly in the Swiss credit market, this percentage rises to 70%. Moreover, residential property is the most important asset overall of households in Switzerland, and mortgage loans are their largest liability. Around 45% of household wealth is invested in real estate, and mortgage loans account for a full 95% of household debt.5 These figures highlight a further important aspect: The real estate market is largely debt financed. Roughly 95% of mortgage loans are granted by banks. There are thus close links between the mortgage and real estate markets and the banking sector. A final important fact is that real estate markets have historically been subject to prolonged and pronounced cycles. Such cycles can last for years or even decades. During the long upswing phases, risks tend to be underestimated, thereby leading to excessive risk-taking by households, companies, investors and banks. A downswing, by contrast, can generate the mutually reinforcing effects of falling prices and loan defaults. This can lead to severe upheavals in the banking system and entail high economic costs.
The picture of employment is nevertheless rather divided. The number of jobs in the manufacturing industry has declined markedly, while jobs in the public sector and the service industries have increased. Given this, the situation on the labour market is of particular interest. It appears to be relatively constrained, considering that we are at the end of an economic downturn and wage increases have also been slightly higher than expected, particularly in the construction sector and the service industries. As the level of employment has been retained, despite the decline in demand, productivity has shown a weak development, particularly in the services sector. To some extent, the effect of companies' higher costs has not had an impact on prices, but instead led to falling profit shares. However, it now appears that the demand situation has enabled companies to shift a larger part of the cost increases onto consumers. So, how come wage increases have been higher than expected? One possible explanation may be that the resource utilisation in the economy has been higher in recent years than we had earlier believed. A strained resource utilisation means quite simply that the total demand is high in relation to the production capacity of the economy. This is usually revealed, for instance, in rising wage increases and higher underlying inflation. In the Inflation Report presented on 19 March 2002, we have made a slight upward revision for resource utilisation.