London housing market prone to a
London with an index score of more than 1.5 was judged to be the most overvalued property market by UBSReuters

Swiss global financial services company UBS, has warned that the spiralling price of homes in London has left the city prone to a "bubble risk" increasing the chances of a correction.

Advising caution, UBS said that the reason for the prices in London to have increased by 40% since the beginning of 2013 was not only because of demand from foreign investors seeking safe-havens but also due to the UK government's housing policy - the Help to Buy scheme and the attractive returns on Buy to Let investments - in the backdrop of demand continuing to exceed supply.

"London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behavior since 2013. [It risks a] substantial price correction should the fundamentals for estate investment deteriorate" according to the UBS Global Real Estate Bubble Index report.

London is now the second least affordable of the 15 urban centres studied by the Swiss bank, the report said. It would take 14 years for a skilled service sector employee with average earnings to be able to purchase a two-bedroom apartment in London. This compares to more than 20 years in Hong Kong but less than five years in Boston and Chicago, the report noted.

However, London with an index score of more than 1.5 was judged to be the most overvalued property market. Its price-to-income and price-to-rent values have touched all time highs even as real earnings have declined by 7% since 2007.

"Between 1985 and 2009, whenever the index exceeded 1.0 ... a real price correction of on average 30% began within three years 95% of the time," UBS said, indicating to investors that they should not expect real price appreciation in the medium to long run.

According to yesterday's (October 29) bank data, the net mortgage lending witnessed the sharpest rise since 2008 as it increased to £3.6bn (€5bn, $5.5bn) in September despite approvals declining to 68,874 from 70,664, leaving September's total higher than the six-month average.

A separate report by the Nationwide indicated that housing prices soared to a six-month high in October as average home prices increased by 6% to £196,807, in comparison to an increase of 3.9% on an annual basis.

This increase in prices seems to have slowed actual sales as the Confederation of British Industry (CBI) reported that October's retail sales witnessed the slowest growth rate in six months after September's big increase.