4  BIS central bankers’ speeches  mortgage and real estate markets? In my opinion, the answer is no, since, in a longer-term perspective, mortgage rates are still at very low levels. And imbalances on the mortgage and real estate markets remain high. Chart 7a illustrates this using the relationship between developments in real estate prices and rents, while chart 7b does the same using the ratio of outstanding mortgages to GDP. In addition, despite a slight rise in mortgage rates, there are a number of other channels through which the prevailing low interest rate environment could further increase the risks to financial stability. I would now like to look at three of these risks in greater detail. Risks to financial stability First, in the real estate market, there is an increasing focus on movements in the prices of residential investment property. Both private and institutional investors, such as pension funds and insurance companies, can boost the demand for real estate investments even further, either through the search for yield, or because of a lack of other investment opportunities. Yields on real estate investments continue to be well above those on alternative investments, as shown in chart 8a, which compares yields on ten-year Confederation bonds with those on investments in residential real estate.5 This yield difference could cause demand to stay high for the near future, thereby pushing prices up even further.
From a financial stability perspective, the resulting squeeze on profits could ultimately lead to banks having insufficient reserves with which to increase or maintain their capital levels. This reduces the resilience of the banking system and increases the risks to financial stability. In sum, I can say that particular attention needs to be paid to financial stability in an environment of persistently low interest rates, especially when combined with negative interest rates. Therefore, the slightly slower momentum currently being observed on the mortgage and real estate markets is welcome, but we should nevertheless remain alert. Conclusion In a number of respects, the current situation is unusual for Switzerland and its economy. The significant overvaluation of the Swiss franc and the very low, or even negative, interest rates pose a major challenge for economic agents and authorities – in particular the SNB. Yet, as I have explained, our monetary policy has not changed fundamentally. As a small economy that is strongly interconnected with the rest of the world, Switzerland is heavily dependent on economic developments abroad, and will remain so. These developments can explain the current strength of the Swiss franc, but they are also part of what has driven the exceptionally low interest rates in Switzerland. Neither the strong currency nor low interest rates are new phenomena. Rather, they are traditional characteristics of the Swiss economy, which have had a positive effect on living standards in the past.