hong-kong Photo: Mike Behnken/Flickr

Given all the talk of housing bubbles in some of the world’s hottest real estate markets, it was only a matter of time before economists developed an index geared toward tracking them.

With UBS CIO Wealth Management’s first Global Real Estate Bubble Index, released yesterday, the global financial services firm has looked for signs of housing bubbles in 15 major financial centres.

London and Hong Kong are both in housing bubble territory, according to the index, and home prices in Sydney, Vancouver, San Francisco and Amsterdam are “significantly overvalued.”

“Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow,” said Claudio Saputelli, UBS head of global real estate, in a statement.

UBS defines a bubble as “a substantial and sustained mispricing of an asset” and says “typical signs are a decoupling of house prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity.” Tracking these trends forms the foundation of the UBS Global Real Estate Bubble Index.

In London, which had the highest index at 1.88 (1.5 or higher signifies bubble risk) real home prices have leapt nearly 40 percent since early 2013, which UBS attributes to foreign demand. “Global geopolitical risk and the high property valuations in Asian cities have helped to propel London house prices to new heights,” UBS said in a statement.

ubs-bubble-index Graphic: UBS CIO Wealth Management

Meanwhile, the second-riskiest city, Hong Kong, has an index of 1.67, and has seen prices skyrocket 200 percent since 2003. The report noted that it has now gotten to the point in Hong Kong where highly skilled workers can only afford three square metres of property. “Weaker economic growth in China, a worsening job market and the risk of rising interest rates are overshadowing the outlook,” notes UBS, which is predicting home prices to drop 10 percent before 2017.

In a comparison between 11 select cities, Vancouver, with its index of 1.35 , was the second most overvalued market not in bubble territory, outpaced only by Sydney, which has seen housing prices soar close to 30 percent since 2012 and has an index of 1.39.

The report noted that as Vancouver’s prices surged upwards by 25 percent since 2006, income growth has remained limited to the single digits. However, while UBS says “valuations look very stretched today” it adds the market “has slowed significantly of late, however, and the city is now moving in line with the overall Canadian housing market.”

Yesterday, the Canada Mortgage and Housing Corporation, the country’s national housing agency, released its Housing Market Assessment which concluded there was moderate evidence of overvaluation. (In Toronto, Montreal and Quebec City, evidence was strong.)

Chicago was the only city on that list that was actually undervalued, and Boston and New York were regarded as fair-valued, the latter still not having recovered for 2008’s market crash.

Of course, whether or not either of the two markets identified as being at risk of a housing bubble are actually in one is unclear. Bubbles are tricky things to measure. “Their existence cannot be proven conclusively unless they burst,” said UBS.

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