The world's most at-risk cities for a housing bubble are Hong Kong and London, but Sydney is not far behind, a new report has suggested.
The UBS Global Real Estate Bubble Index found property prices in many major cities have more than doubled since 1998 in real terms, with prices now largely higher than they were prior to the global financial crisis.
It leaves house prices in most major cities in the 'overvalued' range, according to UBS, while the "risk of a residential property bubble is most distinct in London and Hong Kong".
Next in line is Sydney, which has logged a sharp run up in prices over the past 12-18 months, with the city's property market labelled as "significantly overvalued" ahead of markets in Vancouver, San Francisco and Amsterdam.
Sydney recorded a score of 1.38, behind only Hong Kong and London, which topped the 1.5 'bubble' mark.
Ominously, the report noted that whenever the index topped 1.0 a "real price correction of, on average, 30 per cent began within three years 95 per cent of the time," with investors urged not to expect "real price appreciation in the medium to long run.”
The index focuses on 15 of the world's leading financial centres, with Paris, Tokyo and New York among the cities with fairer valuations than Sydney. No other Australian cities were analysed.
"A mix of optimistic expectations, favourable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalisation of housing markets and encouraged local bubble risks to grow," Claudio Saputelli, Head Global Real Estate in UBS Chief Investment Office Wealth Management, said.
While Sydney prices are overvalued, there are several leading financial centers that have more worrying price-to-income metrics based on house or apartment size.
"House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-metre apartment exceeds the budget of most people who work even in the highly skilled service sector," Matthias Holzhey, economist at UBS CIO WM, said.
Sydney's relatively large property size ensures it performs better on this metric.