(Bloomberg) -- Price dynamics in Switzerland’s residential-property sector are slowing in the wake of higher interest rates but the market remains vulnerable, according to Swiss National Bank Vice President Martin Schlegel.

While increased borrowing costs are reining in price growth, they are also pushing up rents as landlords are allowed to pass on part of higher mortgage expenses to tenants. This could lead to a temporary uptick in inflation, Schlegel said Friday in Lausanne. 

He said the pace of price gains is expected to dip back below 2% — the upper end of the SNB’s target range — in the medium term, though he reiterated that pressures remain elevated and further rate hikes can’t be excluded.

Schlegel’s remarks to an audience of real estate professionals come after house prices in Switzerland climbed to their highest level in at least six years, feeding concern the market may be overheating. SNB President Thomas Jordan said this month that prices may drop, depending on how rents develop.

Sluggish construction along with a growing population has been driving up residential property costs in the country for years. Hiring by multinationals has attracted many foreigners and has seen home prices in Zurich surge past levels in Paris and London.

The SNB has raised interest rates by 250 basis points in the space of a year. Switzerland’s national benchmark for mortgages is expected to show an uptick when it’s next published on Dec. 1, which could lead to widespread rent hikes.

Schlegel added that he sees limited risks for the financial sector from these trends. The SNB’s stress tests show “most banks could handle even a strong rate increase,” he said.

Mortgages account for around 85% of domestic credit volume in Switzerland, according to an earlier statement from the central bank.

(Updates with Schlegel comments starting in second paragraph.)

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