The UBS Global Real Estate Bubble Index ranked Sydney as the fourth most at risk city of a housing bubble behind Vancouver, London and Stockholm.

UBS chief investment officers and authors of the report, Claudio Saputelli, Matthias Holzhey, and Maciej Skoczek say the common feature shared by potential bubble cities was interest rates.

“What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy,” they said. 

“When combined with rigid supply, as well as sustained demand from China, this has produced an ideal setting for excesses in house prices.”

According to the report, house prices in ‘near bubble’ prices have increased by nearly 50 per cent on average since 2011, compared to less than 15 per cent in other cities.

Sydney was rated 1.7 on the risk index, above the bubble benchmark of 1.5, but well below Vancouver’s 2.14.

While Sydney may have all the market factors for a bubble, it remains unclear when or how a potential correction could play out, with the report concluding that investors should be wary of sudden corrections.

“The situation is nevertheless fragile. A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time.”