Sydney’s real estate is the third most overpriced in the world according to a global investment bank.

According to the Global Real Estate Bubble Index report released by UBS last week, Sydney’s real estate is behind only London and Hong Kong when it comes to being overpriced.

On the Global Real Estate Bubble Index, Sydney scored a 1.39, and while that is below the required score of 1.5 which classes a market as being at risk of a bubble, UBS does believe Sydney is faced by the possibility of a significant correction in prices.

“Real housing prices have increased almost 30% since 2012, while rents and incomes have stagnated. The prices are also influenced by strong Asian demand,” the report said.

“Gradually deteriorating economic conditions, a slowdown in China and tighter regulations increase the risk of a significant correction in the medium term.”

According to the report, Sydney, Paris and London have price to rent ratios – the number of annual rents required to purchase the equivalent property – of around 30, which puts their markets at risk if there was to be a sudden interest rate rise.

“Paris, London and Sydney… form a trio of cities with PR multiples around 30.

“House prices in these cities are vulnerable to a sharp correction should interest rates rise.”

Currently the report believes only London and Hong Kong are at risk of bubbles forming in their real estate markets, with the two scoring 1.88 and 1.69 on the Global Real Estate Bubble Index respectively.

“When inexpensive financing is combined with bullish expectations, real estate prices eventually uncouple from the real economy”, the report said.

“We have seen this in the current cycle, particularly in the world’s leading financial centres, where housing prices are now, in many cases, fundamentally unjustified.

“Bubble risk is most distinct in London and Hong Kong.”