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Residential houses are seen during sunny winter weather on a mountainside in the town of Unteraegeri, Switzerland February 5, 2019. REUTERS/Arnd Wiegmann

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ZURICH, March 29 (Reuters) - Switzerland has become more vulnerable to a shock from its inflated property sector, Swiss National Bank Vice Chairman Fritz Zurbruegg said on Tuesday, adding it is not the job of monetary policy to curb the risks.

The SNB estimates Swiss apartments to be overvalued by 10% to 35% at present, as ultra low interest rates and tight supply have driven up prices.

"In Switzerland, vulnerabilities in the residential real estate and mortgage markets have increased since the onset of the pandemic," Zurbruegg said in a speech in Geneva.

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"Moreover, we have observed an increase in affordability risks over recent years."

A sudden crash in housing prices could eventually lead to loan defaults, banking losses and tightening credit to the real economy, which could lead to an economic downturn, Zurbruegg said.

While the SNB has stuck with its low interest policy, other central banks are raising interest rates to fight inflation. read more

However, the global level of interest rates is likely to remain low, Zurbruegg said, dampened by demographics, inequality and a strong demand for safe assets.

"Monetary policy has no influence over these factors. Even more importantly, the focus of monetary policy is price stability and economic developments, and not curbing financial system vulnerabilities," he said.

Instead, tools like making banks hold more capital against property loans were better ways to improve the resilience of the financial sector, Zurbruegg said.

In January, Switzerland reactivated its counter cyclical capital buffer to build up the loss-absorbing capacity of lenders if property prices collapse.

"Going forward, this resilience must be preserved," Zurbruegg said.

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Reporting by John Revill Editing by Paul Carrel

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