UBS report shows Sydney property third most over-valued in the world

London and Hong Kong are most at risk of a housing bubble, but Sydney is creeping up in terms of having the most overpriced property in the world.

According to a new report by Swiss-based UBS Group, Sydney property is the third most over-valued in the world, followed closely by Vancouver, San Francisco and Amsterdam.

While Sydney’s house prices have surged almost 30 per cent since 2012, rents and salaries have remained sluggish, the UBS Global Real Estate Bubble Index shows.

Only London and Hong Kong are within the “bubble-risk” zone, but Sydney is one of 10 major cities categorised as “over-valued” and therefore at a high risk of a “large price correction”.

In Sydney, “gradually deteriorating economic conditions, a slowdown in China and tighter regulations increase the risk of a significant correction in the medium term,” the global financial services company says.

While Sydney property is significantly over-valued, the UBS Global Real Estate Bubble Index shows it takes a skilled worker with an average income about seven years to buy a 60-square-metre apartment near the city centre. In London, Paris, Singapore and New York it would take the same worker more than 10 years.

In Hong Kong, even those who earn twice the average income would struggle to afford an apartment of the same size, the report says.

When it comes to the ratio of house price to annual rent – that is, the amount of rent each year required to purchase a flat of the same size – Sydney comes in eighth on the list.

This means it would take someone in Sydney, London or Paris 30 years’ worth of rent to afford an apartment of the same size.

House prices in these three cities are at risk of a sharp correction if interest rates rise, UBS warns.

According to the UBS report, a decline in house prices could be triggered by “a change in macroeconomic momentum, a shift in investor sentiment or a major supply increase”.