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Soaring house prices in London risk substantial correction should the fundamentals deteriorate, warns UBS

UBS warns "explosive" house price growth since 2013 has fuelled an overvalued market that could see prices crash within three years Soaring house prices in London have fuelled a "bubble-risk" that has left the capital most in danger of a correction out of all major cities in the world, UBS has warned.

The Swiss bank said foreign demand from investors seeking safe-havens, the Government's help to buy scheme and "alluring yields" on buy-to-let investments had all "propelled London house prices to new heights" as demand continued to outstrip supply.

UBS said "caution" was warranted as London now risked a “substantial price correction should the fundamentals for estate investment deteriorate".  "London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behavior since 2013," the report warned.

Its real estate bubble index shows London property is now the second-most unaffordable of the 15 cities studied by UBS, behind only Hong Kong. "Price-to-income and price-to-rent values have surged to all-time highs even as real earnings have fallen 7pc in London since 2007," UBS said.

The report noted that it would take a skilled service-sector worker the equivalent of 14 years of average earnings to be able to buy a two bedroom flat. This compares with more than 20 years in Hong Kong and less than five years in Boston and Chicago.

However, London was judged to be most overvalued property market, with an "index score" of more than 1.5.

"Between 1985 and 2009, whenever the index exceeded 1.0 ... a real price correction of on average 30pc began within three years 95pc of the time," UBS said.

"Investors in overvalued markets should not expect real price appreciation in the medium to long run."

The report also noted that "all European cities currently exceed fair valuation... Amsterdam and Frankfurt are also on a rising trajectory in overvalued territory".

The Bank of England has asked for more powers to regulate the buy-to-let market, which it has identified as potentially posing a risk to UK financial stability.

Bank data on Thursday showed net mortgage lending rose by £3.6bn in September, representing the sharpest increase since 2008, even as approvals declined unexpectedly.

Approvals slipped to 68,874 from 70,664, but still left the September total above the six month average.

A separate report by the Nationwide showed house prices accelerated to a six-month high in October, with average price of a house rising by 0.6pc to £196,807. On an annual basis, prices rose 3.9pc.

Meanwhile, the Confederation of British Industry (CBI) said retail sales grew at the slowest rate in six months in October after a big increase in September.