London property bubble 'riskiest in the world'
London's property market is the most overvalued of any capital city in the world, and is set for a major fall, UBS has warned.
After years of 'explosive' growth fuelled by international investors, the government's help to buy scheme and high yields on buy-to-let investments, the London market is now on course for a major correction, the Swiss bank says.
"Foreign demand and demand deriving from safe-haven seekers largely explain current valuations. Global geopolitical risk and the high property valuations in Asian cities have helped to propel London house prices to new heights," reads the report.
"London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behavior since 2013."
Hong Kong, Sydney, Vancouver, San Francisco and Amsterdam are also highlighted.
"A mix of optimistic expectations, favourable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years," says Claudio Saputelli, head of global real estate in UBS' Chief Investment Office Wealth Management.
"Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow."
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The report notes that in London, while real earnings have fallen 7% in London since 2007, price-to-income and price-to-rent values have surged to all-time highs.
House prices have shot up by 40% since the beginning of 2013, and it would now take a skilled service-sector worker 14 years of average earnings to be able to buy a two-bedroom flat. Only Hong Kong is less affordable for local workers.
But it's London that's most likely to see a fall in property prices, says UBS, with an 'index score' of more than 1.5, based on price-to-income and price-to-rent ratios. To put this in context, UBS says that between 1985 and 2009, whenever a city's index has gone above 1.0, a real price correction of on average 30% has begun within three years, 95% of the time.
Land Registry data released earlier this week shows that, for the first time, the average London property now costs £499,997 - well over twice the price for the rest of England and Wales. London prices rose by 9.6% over the last year.
