London Tops Global Property Bubble Risk Index

London Tops Global Property Bubble Risk Index.

UBS Wealth Management, the Swiss international bank, yesterday launched its Global Real Estate Bubble Index focusing on property prices and affordability in financial centres across the world.

The Property Bubble Risk Index has been designed to reflect the risk of a property bubble developing and ultimately a real estate property price correction within a financial centre. The index reflects historic prices, affordability for both purchase and rental income when compared to general household income.

At zero, a property market is considered to be fair value i.e. property prices reflect local wages and earnings capacity as well as demographics for population movement, increases or decreases.

To quote UBS: "Cities at or near the bubble risk zone face a higher risk of a large price correction". In addition, where the index exceeds 1.0, ACT has entered significant overvaluation territory and there is a real risk of property price correction of up to 30% within three years. The latest Property Bubble Risk Index is as follows:

• 1.5+ = London and Hong Kong
• 1.0+ = Sydney, Vancouver, San Francisco and Amsterdam
• 0.5+ = Geneva, Zürich, Paris, Frankfurt, Tokyo and Singapore
• 0.0+ = New York and Boston
• -0.0 = Chicago

London is at 1.88 and is at the highest bubble risk rating and this has been put down to house prices being decoupled from local earnings due to both local wealthier investor and global investor demand. The population of London is set to expand by an estimated 1 million people in the next five years (source: Office for National statistics) and when combined with the fact that London is seen as a safe haven with political stability it is no surprise that even though UK house prices on average are lower than they were in the 2007 peak, house prices in London are 6% higher yet real average earnings have fallen by around 7% per annum.

That said, many property commentators still suggest that property growth in London will continue for the next two years or so. As ever, markets move in cycles and the London property market will see another correction we estimate within the next four years, probably a fall of around 15% rather than the 30% correction suggestion within the property bubble index. We suggest this lower bubble risk purely because demand will continue to exceed supply given that the volume of new build property in London, let alone the UK, cannot possibly meet the expected increases in population.