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London and Hong Kong at high risk of housing bubble, says UBS

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(Oct 29): London and Hong Kong are the cities most at risk of a housing bubble as real estate begins to look overvalued, according to UBS Group AG.

The UK capital is now the second-least affordable of the 15 urban centers studied by UBS, trailing only Hong Kong, the report said. Price-to-income and price-to-rent values have surged to all-time highs even as real earnings have fallen 7% in London since 2007, UBS said.

London risks a “substantial price correction should the fundamentals for estate investment deteriorate,” the report said. “We advise caution.”

London house prices have surged 40% since the beginning of 2013 because of demand from overseas buyers, attractive rental yields and population growth, the Swiss bank’s global real estate bubble index shows. The Bank of England has asked for more powers to regulate lending to so-called buy-to-let investors, who are attracted by rental yields of more than 5% compared with 1.8% for benchmark UK government bonds.

“House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo,” Matthias Holzhey, an economist at UBS’s chief investment office and wealth management unit, said. “Buying a 60 sq m apartment exceeds the budget of most people who work even in the highly skilled services sector.”

Sydney, Vancouver, San Francisco and Amsterdam are also significantly overvalued based on long-term norms, the report said. Prices are stretched in Geneva, Zurich, Paris and Frankfurt and are fair in New York and Boston, UBS said. Chicago is undervalued.

“Loose monetary policy has prevented a normalisation of housing markets and encouraged local bubble risks to grow” around the world, Claudio Saputelli, head of global real estate at UBS’s chief investment office, said in the report.

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