London has been identified as one of a number of ‘bubble risk cities’ in a report by Swiss bank UBS.
In a report prepared by the bank’s Global Wealth Management's Chief Investment Office, 20 major financial centres around the world have a spotlight put on them.
Hong Kong faces the greatest risk of a bubble followed by Munich, Toronto, Vancouver, Amsterdam and London. By contrast it says property markets in Boston, Singapore and Milan seem fairly valued while Chicago is undervalued.
The UBS measures for London's ‘bubble vulnerability’ actually declined this year compared to last, but the UK capital remains in the risk zone.
“Inflation-adjusted prices are more than 10 per cent higher than in 2007. House prices have lagged the British average, dropping five per cent in inflation-adjusted terms since mid 2017, but housing remains unaffordable for Londoners” warns the bank.
“Buying a 650 square foot flat near the city centre costs 15 average annual incomes for skilled service workers, and inflation continues to erode residents' purchasing power” it continues.
“The prime segment has been hurt by higher stamp duties for luxury and buy-to-let. However, from the perspective of foreign investors, house prices have already fallen 10 per cent in US dollar terms since 2015, making them more attractive. We expect prices to stabilize although we still advise caution given high market valuations and uncertainty over political factors like Brexit.”
But there is some optimistic news from the survey.
UBS says that in contrast to the boom of the mid-2000s, no global evidence of simultaneous excesses in lending and construction exists. Outstanding mortgage volumes are growing half as fast as in the run-up to the 2008 financial crisis, limiting economic damage from any price correction in the coming years.
"Although many financial centers remain at risk of a housing bubble, we should not compare today's situation with pre-crisis conditions" says Mark Haefele, chief investment officer at UBS Global Wealth Management. "Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto, and London."