UBS says London's housing market still faces the risk of becoming a bubble - although that risk has marginally eased over the past year.
The bank's wealth management division's annual 'real estate bubble index' shows that London has the second highest risk of a bubble among the European cities in the study.
UBS says London’s inflation-adjusted housing prices are almost 45 per cent higher now than five years ago and 15 per cent higher than before the financial crisis a decade ago. But real income remains 10 per cent lower than in 2007.
The rise in house prices, however, has been decelerating since the UK referendum in June 2016, and real prices are now two per cent lower while mortgage rates are at all-time lows.
"Nevertheless, housing remains highly unaffordable for London’s citizens. A skilled service worker needs to work almost 16 years to buy a 60 square meter (650 square foot) flat near the city centre" says the bank survey.
"Favorable credit conditions and the help-to-buy scheme have kept demand in the lower-price segment high. But the prime market now faces oversupply as increased stamp duties on luxury and buy-to-let properties hamper demand" UBS warns.
Across the world the survey suggests Toronto faces the greatest risk of a housing bubble, followed by Stockholm, Munich, Vancouver, Sydney, London, Hong Kong, and Amsterdam.
Meanwhile the latest data from Hometrack’s UK Cities House Price Index reveals that Manchester is where house prices are growing fastest rising at 7.3 per cent in the past 12 months to August.
This upward trend is also mirrored in Birmingham with prices in the second city growing 6.7 per cent over the same period and Edinburgh too showing a marked improvement of 6.6 per cent in the past year.
The headline rate of growth across UK cities is running at 4.9 per cent compared to 6.6 per cent in August 2016.
Hometrack says London is acting as a drag on the headline rate of growth. House prices inflation in the capital is running at a 1.9 per cent per annum, below the general rate of inflation - currently 2.9 per cent according to the Consumer Price Index - meaning that London house prices are falling in real terms.
Other cities that have recently enjoyed strong growth such as Cambridge (2.8 per cent) and Oxford (3.8 per cent) have also registered a steep slowdown in the rate of price inflation over the last 12 months as affordability pressures constrain housing demand.