London property is the most at risk of a bubble but watch China, Says UBS

Market bubbles of any asset class are always difficult to spot, until the bubble bursts, but that doesn’t stop analysts trying to predict where the next bubble is brewing and what it will take for the bubble to pop.

The UBS Global Real Estate Bubble Index is designed to track the risk of housing bubbles in global financial centers. By tracing the fundamental valuation of housing markets, the valuation of cities in relation to their country and economic distortions the index gives a broad indication of how overvalued or undervalued a city’s property market is relative to historic norms. Each city is given a score based on five standardized city sub-indices: price-to-income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio and change in construction-to-GDP ratio (economic distortion) and relative price-city-to-country indicator. Those cities with a score of less than -1.5 are considered to have depressed property markets. Cities with a score of -1.5 to -0.5 are considered undervalued, fair-valued -0.5 to 0.5, overvalued 0.5 to 1.5 and bubble risk above 1.5.

Real Estate Bubbles: Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong Top List

London property is at risk of overheating 

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According to the index, Vancouver has the property market with the highest bubble risk — real house prices have increased by more than 25% since the end of 2014.

London closely follows the Canadian city with a score of 2.06. Over the last four quarters, London property prices have increased by around 10%, outpacing property prices in the rest of the country by more than seven percentage points. Real property prices are now 15% higher than at the 2007 market peak, while real incomes are 10% lower. It now takes a skilled service-sector worker approximately 15 years of average earnings to be able to buy a 60m2 dwelling.

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• China Real Estate Bubble

Chicago sits at the opposite end of the spectrum with a score of -0.7 indicating a depressed property market according to the UBS Global Real Estate Bubble Index. Between 2006 and 2012 real house prices in Chicago experienced a severe correction of 35% but have only recovered by 10% over the past four years making properties more affordable and improving the price-to-income ratio. Milan is another city with a low bubble risk with a score of -0.09. Prices in some parts of the city are now as much as 30% lower than in 2007 while the ECB’s actions to keep interest rates low have increased mortgage accessibility and affordability for buyers.

Chinese property is back on the boil