London house prices are facing a massive price correction, according to Swiss bank UBS.
Property prices in the British capital are outpacing incomes and rents, making them unaffordable for ordinary homebuyers and tenants.
The report also points out that no other city in the world has house prices so ‘decoupled’ from incomes.
The bank cautioned that a price correction was on the way – but could suggest when this might happen.
The warning came in the bank’s latest Global Real Estate Bubble Index.
London has highest global property prices
Economists and analysts at the bank say London property prices are in a bubble caused by a ‘substantial and sustained’ mispricing of homes, but that the suspicion will not be proved until the bubble bursts.
The report scores property values in a number of leading global financial centres and argues that a factor of 1.5 or more means the market is in a bubble.
London scored 1.88, while the only other leading world city with a score exceeding 1.5 was Hong Kong, with a ranking of 1.67.
UBS says house prices in London have risen by more than 40% since January 2013 and that property prices are among the highest in the world.
The report also shows house prices in the capital are at 6% above their previous peak reached before the global credit crisis struck in 2007, while wages have dropped by around 7% in real terms over the same period.
30% drop in house values predicted
Besides London and Hong Kong, the report explained that housing markets were also ‘overvalued or overstretched’ in Sydney, Vancouver, San Francisco, Amsterdam, Geneva, Zurich, Paris, Frankfurt, Tokyo and Singapore.
“Cities at or near the bubble are at a greater risk of a price correction and a slight move in one of several financial sectors could see house prices fall,” says the report.
“In previous years, an overvaluation that was spotted saw a 30% decline in house prices within three years.”
The report also states that house values have doubled in major financial centres since 1998 and most are now at least as high as their former peak at the start of the financial crisis.