London Property Market at Risk of Becoming a Housing Bubble

London’s property market is at risk of becoming a housing bubble, according to a new report.

Global financial services firm UBS warns that based on previous experiences, the bubble is 95% likely to burst within three years, bringing house prices down by 30%.

London Property Market at Risk of Becoming a Housing Bubble

The group states that London’s house prices are currently the most over-valued of any major city in the world.

It is one of two cities, the other being Hong Kong, where there is a risk of a bubble forming, says the UBS Real Estate Bubble Report.

The study analyses property prices in 15 major cities in the world. It believes that London risks a significant price correction, as house prices have decoupled from local incomes.

UBS reports that London is less affordable for local people to buy homes than anywhere else, except Hong Kong.

London 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 square metre flat near the city centre. In the capital, it would take 14 years.

London’s PI has reached an all-time high and is only behind Hong Kong’s.

Due to the capital’s cheap financing costs and “bullish expectations”, there is a real danger of the market decoupling from the whole economy, warns UBS.

The UBS’s index rates London at 1.88.

The study found that between 1985-2009, whenever the index exceeded 1, “a real price correction of an average 30% began within three years 95% of the time”¹.

It expects London house prices to drop by more than 10% by the end of 2016.

UBS also believes that homes are over-valued in Sydney, Vancouver, San Francisco, Amsterdam, Geneva, Zurich, Paris, Frankfurt, Tokyo and Singapore. However, it found that prices are fair-valued in New York City and Boston, and properties in Chicago are under-valued.

Claudio Saputelli, Head of Global Real Estate at UBS, says that in the world’s leading financial centres, house prices are now “fundamentally unjustified”.

He adds: “While it is not always possible to prove conclusively the existence of a bubble, it remains essential to identify the signs of one early one.”¹ 

¹ http://www.propertyindustryeye.com/bank-warns-that-londons-property-market-is-worlds-biggest-bubble/