2nd November 2015
Swiss banking giant UBS has warned that London’s housing market is in serious bubble territory given that “price-to-income and price-to-rent ratios have reached all-time highs”.
In its Global Real Estate Bubble Index report, the organisation said that only Hong Kong exhibits worse affordability levels than the British capital.
It asserted that house prices have decoupled from local household earnings due to both local and global investment demand pushing them up.
UBS said that average home prices have soared by almost 40% since the beginning of 2013, more than offsetting all losses triggered by the financial crisis.
As a result, London is one of the most expensive cities in the world based on price-to-income and price-to-rent ratios that have surged to all-time highs.
It highlight that it would take a skilled service-sector worker approximately 14 years of average earnings to be able to buy a 60m2 home as the expense of buying a flat is comparable to renting it for 30 years.
UBS noted that London house prices, in real terms, are 6% above their previous 2007 peak despite nationwide prices having declined by 18%.
It stated: “The decoupling of the London real estate market from the rest of the UK is even more drastic considering that, in the same period, real average earnings fell by 7% both in London and UK-wide.
“Foreign demand and demand deriving from safe-haven seekers largely explain current valuations. Global geopolitical risk and the high property valuations in Asian cities have helped to propel London house prices to new heights.”
But it added that domestic buyers too have contributed to the appreciation as the government’s “help-to-buy” scheme, alluring yields on buy-to-let investments and ongoing population growth have stoked demand.
Overall it advised caution as its own conclusions, coupled with other benchmarks “point to the risk of a substantial price correction should the fundamentals for real estate investment deteriorate”.