Brexit may spark 'substantial' London home correction, UBS says

[LONDON] London's housing market faces severe price declines if the UK's vote to leave the European Union triggers an extended period of economic weakness, according to UBS Group AG.

A severe recession could halt the "unsustainable price growth fueled by ample liquidity and tight supply," UBS said in a report accompanying its Global Real Estate Bubble Index. London is one of six cities, led by Vancouver, considered at risk of a bubble because prices have increased by an average of 50 percent since 2011, according to the report.

"What these cities have in common is excessively low interest rates, which are not consistent with the robust performance of the real economy," Claudio Saputelli, head of global real estate at UBS Wealth Management's chief investment office said in an e-mailed statement.

"When combined with rigid supply and sustained demand from China, this has produced an ideal setting for excesses in house prices."

Homes in the UK capital have increased at a double-digit rate each year since 2013, decoupling prices from local earnings, according to the report. The Bank of England cut its benchmark lending rate in August for the first time in seven years to 0.25 per cent.

House prices in bubble-risk markets, which also include Stockholm, Sydney, Munich and Hong Kong, are vulnerable to sharp increases in supply, higher interest rates or shifts in international capital flows. Any of these factors "could trigger a major correction at any time," real estate economist Matthias Holzhey said in the statement.

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