August 13, 2012

By Michael Shaoul, Ph.D., Oscar Gruss

The UBS Swiss Bubble Index measures six factors in the local real estate market (purchase vs. rental prices, house prices vs. household income, house prices vs. inflation, mortgage debt vs. income, construction vs. Gross Domestic Product (GDP) and the proportion of credit applications for residential income property by UBS clients) and blends them into a unified measure. Each integer then represents a standard deviation above or below "normal" conditions with the index being calculated on a quarterly basis.

At the end of the first quarter of 2012, the index stood at 0.95, on the boundary between a "boom" and a "risky" market. The second quarter saw a small pullback in the index back to 0.82 (we do not have access to the various sub-indexes and so cannot say which caused the modest decline). This keeps the Swiss housing market in buoyant conditions, but does not (yet) signal the sort of boom which would place the SNB under pressure to reconsider its stance on controlling the €/s₣ cross rate. This policy has caused a substantial increase in SNB Reserve Assets held in Euros, with the second quarter of 2012 alone seeing a surge of 79.5 bln (77.0%), while Swiss interest rates are currently at or below zero through a maturity of six years. Under such conditions one would imagine it is only a matter of time before the UBS index makes the transition into higher, and unhealthier territory.

Source: This article was excerpted from The Daily Speculator, Dr. Michael Shaoul, Ph.D., August 3, 2012, www.oscargruss.com.

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