London House formed most overvalued in world, warns UBS.

It said the ratios of property prices to incomes, and property prices to rents, have reached all-time highs.

And it warned that London house prices have become more "decoupled" from household earnings than anywhere else in the world.

More than any other big city, the capital now faces the risk

of a "substantial" price correction.

However it was not able to predict when any such correction might occur.

In its Global Real Estate Bubble Index, UBS says any city scoring more than 1.5 is at risk of a bubble.

London had the highest score, at 1.88.

Hong Kong came second, with a score of 1.67.

'Drastic'

Real house prices, after adjusting for inflation, have soared by almost 40% in London since the beginning of 2013, said UBS.

That makes London one of the most expensive cities in the world.

Amongst other findings in the report:

• London house prices are, in real terms, 6% above their 2007 peak. This compares with a national drop in house prices of 18%

• The decoupling of the London market is "even more drastic" considering that real average earnings have fallen by 7% since 2007.
• The demand for London properties was largely driven by foreign investors, but domestic buyers have also helped to boost prices.
  UBS said the government's Help to Buy scheme had stoked demand too.
  On past experience, UBS said that a price correction of 30% usually occurs within three years of the index exceeding a score of 1.0.
  New York, Boston and Chicago were among the cities at least risk of a housing bubble.