Major investment bank UBS has warned Sydney's housing market is significantly overvalued because of strong Asian demand and low interest rates, which increases the risk of a significant downturn.

In a new report on its Global Real Estate Bubble Index, the investment bank said real estate in the majority of the world's cities was significantly overvalued with Hong Kong and London most at risk of a housing bubble.

Sydney was ranked third in the index, just below bubble status, with housing prices that were overvalued.

House prices were also considered to be overvalued in Vancouver, San Francisco, Amsterdam, Geneva and Zurich.

"Hong Kong has flirted with a bubble since 2011, while Sydney's market is catching up quickly and trending close to it," the report said.

The UBS report said that between 1985 and 2009 when home prices in a city reached the upper half of overvaluation territory or greater than one in the index, then a real price correction of on average 30 per cent began within three years, 95 per cent of the time.

The report ranked Sydney's real estate prices at 1.39 in the UBS index and said that housing prices had increased almost 30 per cent since 2012 while rents and incomes had stagnated.

David Sokulsky, head of investment strategy at UBS Wealth Management, said the Sydney housing market was looking at a price fall if Asian economies slowed down.

"In terms of Sydney, it is not in the extreme 'bubble risk' category, however, the index shows that it is significantly overvalued and this suggests that investors should not expect real price appreciation in the medium to long term," Mr Sokulsky said.

"The Sydney market is influenced by strong Asian demand and as such any deterioration in Asian economic fundamentals leading to lower demand for Sydney property increases the risk of a significant correction in the medium term."

Economic growth in China is at the slowest since the global financial crisis at 6.9 per cent annual growth and last week authorities cut interest rates for the sixth time this year.

The index is based on data including price-to-income ratios, price to rent, a measure of mortgage to GDP, construction to GDP and a city by city comparison in each country.

Sydney market increasingly dependent on low rates

Mr Sokulsky said the price to rent data indicated that the Sydney market "is increasingly dependent on low interest rates".

"The good news being that the RBA (Reserve Bank) seems unlikely to hike rates in the near term and as such the market can remain overvalued for some time without significantly correcting," he said.

"The bad news is that this does leave Sydney vulnerable to the RBA when they do eventually raise rates, and without domestic wage growth, the fallout could be quite severe."

The RBA meets on Melbourne Cup day to discuss interest rates and there are expectations it may cut the official cash rate of 2 per cent because of independent mortgage rate rises by the big banks.

The big banks have raised rates on standard variable home loans and have blamed their decision on stricter capital requirements by the banking regulator, the Australian Prudential Regulation Authority.

The UBS report said cities at or near "the bubble risk zone" face a higher risk of a house price crash which could triggered by an economic slowdown, a shift in investor sentiment, or a major increase in supply.

Earlier this month, the Reserve Bank warned that a potential supply of apartments in some capital cities could cause a downturn in home prices.

Price correction in Hong Kong 'imminent'

The UBS report said that a price correction seems imminent in Hong Kong with home prices nearly 200 per cent higher than in 2003 but rents had only grown by 35 per cent in real terms and wages had stagnated.

It also said London was sensitive to unexpected economic shocks.

The report said real estate prices in many global cities had doubled since 1998 but home prices were judged to be fair value in New York and Boston in the United States.

Another measure of housing affordability in Australia, the Housing Industry Association Affordability Index, showed it has worsened by 4 per cent nationally over the September quarter from the June quarter.

The HIA said affordability was at its lowest since late 2014.

But affordability did improve in six of the 14 markets looked at.