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London & Hong Kong at ‘high risk’ of house price crashes

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London and Hong Kong are the cities with house prices most likely to face another property price crash, says investment bank UBS, but crucially doesn’t offer a timescale adding that it can’t be proven conclusively until it bursts.

However, its new Global Real Estate Bubble index confirms house prices have far outstripped affordability in twelve urban centres around the world, but said London and Hong Kong face the greatest risks, including a ‘dangerous dependence on low interest rates.’

UBS said the term bubble refers to a substantial and sustained mis-pricing of an asset.

Matthias Holzhey, economist at UBS CIO WM, said: “House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly skilled service sector.”

It said property costs in many global cities have doubled since 1998 in real terms and said the markets in most cities including are overvalued including Sydney, Vancouver, San Francisco and Amsterdam.
Valuations are also stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore, according to the report. The US cities of New York and Boston are fair-valued relative to their own history, while Chicago is undervalued, it said.

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

“It is essential to identify the signs of a bubble early on – that’s why we have launched the UBS Global Real Estate Bubble Index,” said Saputelli.

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