* SNB's low rates have helped property market boom
* UBS bubble index in risk zone despite new mortgage rules
* SNB can enact capital buffer for banks to prevent bubble
* Analysts see chance of SNB steps next year
By Catherine Bosley
ZURICH, Nov 5 The Swiss housing market shows growing signs of overheating, a survey suggests, increasing the chances that the central bank will make good on a threat to impose a capital buffer for banks.
The UBS real estate bubble index has entered its risk zone for the first time since Switzerland suffered a housing market collapse two decades ago. It rose by 0.2 points to 1.02 points in the third quarter, UBS said on Monday.
"It's just a piece of the mosaic," said Matthias Holzhey, an economist in UBS's real estate division. "But probably it does indicate that the likelihood of the central bank doing something has risen."
Swiss regulator FINMA toughened up mortgage-lending standards in July, seeking to thwart a further increase in real estate prices and home mortgage loans, which have already grown 20 percent in the past four years.
Despite signs of a bubble building in the housing market, the Swiss National Bank has been forced to keep interest rates at rock bottom to hold down the value of the franc, in heavy demand as a safe alternative to investing in the euro zone.
The central bank can, however, recommend that the government impose a counter-cyclical capital buffer of up to 2.5 percent of risk-weighted assets in a bank's mortgage portfolio.
It said in late August it did not expect to call for the buffer before the end of the year, in part because the new standards needed time to have an effect.
Yet in a sign the new rules may not be enough, apartment purchase prices rose 6 percent in the third quarter from a year earlier, according to SNB data, much faster than wage growth. The price of homes rose nearly 4 percent during the period.
MAYBE NEXT YEAR
The bulk of Swiss home mortgages are held by the country's smaller banks, rather than UBS and Credit Suisse , which are already subject to strict capital rules imposed after the financial crisis.
At about 40 percent, Swiss home ownership is comparatively low, less than in France or Britain. A high number of skilled workers moving to Switzerland has helped support the market.
According to the statistics office, the vacancy rate for flats was at a low 0.94 percent in June, meaning demand is outstripping supply. In the prime region of Geneva, that rate was at an ultra low 0.33 percent.
According to FINMA spokesman Tobias Lux, early indications showed banks had clamped down on risky mortgage lending. Yet he noted the new regulation only affected mortgages taken out as of July, not the stock of existing loans.
The UBS economists noted there has been an increase in demand for property as an investment and said the rise in mortgage debt showed no sign of abating: "This represents a dangerous trend, as both drivers could easily be thrown into reverse and therefore trigger a price correction," they said.
Slower growth and higher unemployment could increase the likelihood that borrowers cannot afford their loans.
"I think the buffer may come, perhaps in the middle of next year," said Sarasin economist Alessandro Bee. "We're in a phase of the economy cooling right now, you see that in the jobs market, but expect an upswing in early 2013. At the end of this cycle the SNB might feel they need to act."
Information on whether the bank's high-risk mortgage lending has risen or fallen is not publicly available, and the UBS bubble index does not include that data. (Reporting by Catherine Bosley; Editing by Ruth Pitchford)