London's property market is the most overvalued of any major city worldwide and sits in 'bubble-risk territory', according to a report by UBS economists. The bank warns that inflated prices are decoupled from local incomes, and a substantial correction could occur if investment conditions worsen.
The UBS Global Real Estate Bubble Index examined 15 cities, including Hong Kong, Sydney, and New York. London scored 1.88 on the index, with the report noting that historically, when the index exceeded 1.0, a real price correction averaging 30% began within three years 95% of the time. The report advises that new investors should not expect real price appreciation in the medium to long run.
Since 2013, London prices have surged 40%, more than offsetting losses from the financial crisis. The average price now approaches £500,000, with annual inflation at 9.6%. Meanwhile, wage growth remains sluggish, making London one of the least affordable cities based on price-to-income and price-to-rent ratios. A skilled worker needs about 14 years of average earnings to buy a 60 sq m dwelling, and buying a flat costs the equivalent of 30 years' rent.
The report highlights that high dependence on foreign demand elevates the risk of a price correction if that demand weakens. Of the 15 cities studied, 12 were overvalued or at bubble risk, with only New York and Boston fairly valued and Chicago undervalued. Co-author Claudio Saputelli noted that optimistic expectations, favourable fundamentals, and capital inflows have driven valuations, while loose monetary policy has prevented normalisation and encouraged bubble risks.
