UBS has launched a global real estate bubble index and highlighted some serious overvaluations worldwide on this measure.

Housing markets in many cities around the world are overvalued and the risk of a residential property bubble is most prominent in London and Hong Kong, according to UBS.

Of the 15 select cities analysed by the new UBS Global Real Estate Bubble Index, 12 were found to be either overvalued or in danger of a housing bubble. On average, real estate prices in many global cities are higher than before the 2007-08 financial crisis, the bank noted.

The overvalued housing markets identified by the index include Sydney, Vancouver, San Francisco and Amsterdam. Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, in Tokyo and Singapore. In the US, New York and Boston are fair-valued relative to their own history, while Chicago is undervalued, UBS said.

In London, house prices have hit all-time highs as a multiple of local income and rents. Average real dwelling prices in the city have shot up by almost 40 per cent since 2013 and, in real terms, London house prices are 6 per cent above their previous 2007 peak despite nationwide prices having decreased by 18 per cent, according to UBS. In the same period, real average earnings fell 7 per cent both in London and across the UK.

“A number of factors have stoked demand for prime Central London housing, including a search for safe havens, global geopolitical risk, high property valuations in Asian cities, relatively alluring yields on buy-to-let investments and ongoing population growth. We advise caution given the risk of a price correction should the fundamentals for real estate investment deteriorate,” said Bill O'Neill, head of the UK investment office at UBS Wealth Management.

“A mix of optimistic expectations, favourable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalisation of housing markets and encouraged local bubble risks to grow,” said UBS CIO WM's head of global real estate, Claudio Saputelli.