The 1987 stock market crash resulted in an insecurity of many investors which lead them to investing more in the real estate market. Real estate prices doubled from 1980-1990 in that process, mortgages increased by 170% in that decade. Banks supported the trend with lower interest rates. The real estate market is entering full bubble mode. In 1989 constructions of buildings and houses made up ~15% of Switzerlands GDP. Nobody was worried because this time it’s different due to low availability of land and immigration (spoiler: this time wasn’t different either, it never is).
SNB finally realized that it’s not sustainable anymore. They increased the interest rate from 3.5% to 6.0%. The Swiss government introduced new regulations to help damping the increase of real estate prices. It’s too much, interest rates went up to 8-9% in 1991. The real estate market crashed. Single family houses and single apartments by 30-40%, living and working buildings by 50%. The SNB couldn’t do anything as inflation was around 5%. People and companies can’t afford it anymore, they were forced to sell…the market was flooded.
At that time Basel I was in place. So by regulations a bank was (and still is btw with Basel II, will increase to 12% with Basel III) to cover all loans with 8% in own capital (weighted by risk/rating factors). For houses/apartments with a lend-to-value ratio below 66.6% it’s 35% (so 2.8%), for LTV ratio between 66.6-80% it’s 50% (4.0%), for anything above 80% it’s 100% (8.0%). As house prices crashed substanitally, many mortgages went up from below 2/3 to above 80%. Own capital requirements exploded from 2.8% to 8.0%. Approx. 1/3 of all Swiss banks went bankrupt in the following years. People lost their homes and all their cash on the accounts and were left with nothing.
If your bank and you were still around, they left you with only one option: You needed to amortize the mortgage as much as you could. It was a very rough time for house owners. Not only did you have to pay a big amount for interest, you were forced to increase your amortization from 1%/year to 2-4%/year. Many people couldn’t afford it anymore and they were forced to sell the house below their current mortgage amount. 42 billion CHF of mortgages were written off in total (10% of the GDP back then).