Overheated Sydney market is at risk of a housing bubble

The UBS Global Real Estate Bubble Index report analysed residential property prices in 18 cities around the world.

UBS says Sydney's housing market has been overheating since the city became a target for foreign investors several years ago.

It had been the least risky city in Asia Pacific in 2012.

"When combined with rigid supply and sustained demand from China, this has produced an ideal setting for excesses in house prices," the report said.

Sydney housing prices peaked in the second half of 2015 after an increase of 45% since mid-2012.

"Since then, prices have corrected by a low single-digit," it noted on Sydney.

"The Australian residential market is influenced by a rapidly growing foreign demand (in particular, Chinese), which has tripled in value over the last three years.

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"Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly."

The report noted the situation is fragile for the most overvalued housing markets.

A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time, the report warned.

Vancouver tops the index in 2016.

"Bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong.

"Deviations from the long-term norm point to overvalued housing markets in San Francisco and Amsterdam.

"Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo and Frankfurt."

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In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago’s housing market remains undervalued relative to its own history.

While property overvaluations have become more pronounced in many major cities since 2011, according to the report, Vancouver faces the greatest risk of a housing bubble, while London is the riskiest city among the major financial centres.

In contrast, New York, Hong Kong and Singapore prices have stagnated or decreased over the last year, according to the index.

The report noted 'bubble risk zones" where prices within that zone have increased by 50 per cent on average since 2011.

"What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy," the report stated.

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"In a world in which more than a third of all government bonds offer negative yields, investing in tangible assets remains popular.

"So it is hardly any wonder that housing markets are again overheating, just a few years after the last major wave of global correction.

"We see a significant overvaluation of housing markets in some key financial centers.

"What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy.

"This is illustrated by the Eurozone, where monetary policy cannot accommodate the macroeconomic differences between the countries.

"Yet other countries such as Australia, Canada and the UK are also keeping their interest rates artificially low.

"When combined with rigid supply as well as sustained demand from China, this has produced an ideal setting for excesses in house prices.

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"Even in the cities with the clearest signs of a real estate bubble, it is not possible to predict exactly the timing and duration of a correction.

"The situation is nevertheless fragile for housing markets.

"A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time."

It says the publication UBS Global Real Estate Bubble Index reveals the financial centers where the imbalances are most apparent, and the cities where house prices still have fair valuations overall.