Pop? London's housing market is the most overvalued in the world and in bubble-risk territory, UBS Real Estate Bubble Index report finds

 
Lynsey Barber
Follow Lynsey
Source: Getty

London's property market is frothing.

So much so that the capital is home to the most significantly overvalued housing market of any major city in the world, according to a new report - and that means there's a risk the bubble is close to bursting.

"When inexpensive financing is combined with bullish expectations, real estate prices eventually uncouple from the real economy," said UBS head of global real estate Claudio Saputelli.

"We have seen this in the current cycle, particularly in the world’s leading financial centers, where housing prices are now, in many cases, fundamentally unjustified. The risk of a real estate bubble in these cities has risen sharply. While it is not always possible to prove conclusively the existence of a bubble, it remains essential to identify the signs of one early on."

WHICH CITIES ARE BUBBLIEST?

Bubble risk

London, Hong Kong

Overvalued

Sydney, Vancouver, San Francisco, Amsterdam, Geneva, Zurich, Paris, Frankfurt, Tokyo, Singapore

Fair-valued

New York, Boston

Undervalued

Chicago

UBS global real estate bubble index

The report warns that London risks a "substantial" price correction due to its position in the bubble-risk zone and that investors shouldn't expect real price appreciation in the medium to long run.

"A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a decline in house prices," it says, blaming lose monetary policy for preventing normalisation of the market and fostering the growth of a bubble risk.

Read more: No kidding: House prices rose again in October

London also has the second highest price-to-income (PI), a calculation of the number of years a skilled service worker needs to work to be able to buy a 60 metre square flat near the city centre. Its PI is behind only Hong Kong and has hit an all-time high.

"House prices have also decoupled from local incomes in London, Paris, Singapore, New York and Tokyo, PI multiples exceed 10. Unaffordable housing points to high dependence on foreign demand. So the risk of a price correction, should that demand weaken, is elevated, and the long-run appreciation prospects lower."

Demand for London property from foreigners looking for safe haven investments are the biggest cause of current valuations.

"Global geopolitical risk and the high property valuations in Asian cities have helped to propel London house prices to new heights," the report says of the capital. "Domestic buyers too have contributed to the appreciation. The “help-to-buy” scheme, alluring yields on buy-to-let investments and ongoing population growth have stoked demand."

Related articles