Vancouver tops the UBS Housing Bubble Index this year, followed by London and Stockholm. But Sydney is fourth in line, fueling fears that property prices in the harbour city could be headed for a correction.

Hong Kong, San Francisco, Paris and New York, cities world-famous for their high property prices, are behind Sydney on the index.

UBS gauges the risk of a housing bubble by looking at local incomes, rents, the economy, lending levels, and construction activity. 

Of Sydney, the report said, "The Australian residential market is influenced by a rapidly growing foreign demand (in particular, Chinese), which has tripled in value over the last three years. Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly."

The report states that Vancouver, London, Stockholm, Sydney, Munich and Hong Kong are all at risk of sharp falls in house prices, and advises that investors shouldn't expect capital growth in those markets in the medium-to-long term.

House prices in the so-called "bubble-risk zone" have risen almost 50% on average since 2011, which is out of proportion with local economic growth and inflation.

"What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy," wrote Claudio Saputelli, UBS Head of Global Real Estate, and Matthias Holzhey, Head Swiss Real Estate Investments, in the report.

The report says real estate has become the focus of strong investor interest around the world, as central banks drive interest rates to historic lows.

"In a world in which more than a third of all government bonds offer negative yields, investing in tangible assets remains popular. So it is hardly any wonder that housing markets are again overheating," the report said.

UBS Global Real Estate Bubble Index

See also:

Do we have a housing bubble?

The lessons in Vancouver's property market

The world's most liveable cities

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