Sydney has the fourth riskiest housing market in the world after surging in value over the last three years, according to a bank report.

The report, the UBS Global Real Estate Bubble Index, said housing markets in major cities around the world are overheating just a few years after the global financial crisis saw a fall in home prices.

UBS said Sydney's housing prices, adjusted for inflation, peaked in 2015, after a 45 per cent rise since mid-2012 because of rapidly growing demand from foreign investors, in particular Chinese investors.

"Sydney's housing market has been overheating since the city became a target for foreign investors several years ago," the report's authors wrote.

"While Sydney showed the lowest index score of all our covered Asia-Pacific cities in 2012, the market now ranks in the bubble risk category and tops all other cities in the region."

The UBS report said that, since 2015, real property prices in Sydney have fallen by low single digits and it warned of a further correction.

"Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly," the report noted.

Bubble trouble in majority of global financial centres

The report analysed residential property prices in 18 major financial centres and found that home prices were overvalued in a majority of the cities.

The report judged Vancouver in Canada as most at risk of a housing bubble, followed by London, Stockholm, Sydney, Munich and Hong Kong.

"What these cities have in common are excessively low interest rates, which are not consistent with the robust performance of the real economy," the report warned.

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

The report warned that the housing bubble could burst in risky markets especially if interest rates or property supply increased.

"The situation is fragile for the most overvalued housing markets," it warned.

"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."

The report said that home prices in Vancouver were out of step with economic fundamentals which put the city in "bubble risk territory".

"Prices have increased by more than 25 per cent since the beginning of 2015 in the wake of loose credit conditions and a weak Canadian dollar, which apparently stimulated Asian demand even further," UBS explained.

"The risk of a substantial price correction appears very elevated."

London was judged as the most overvalued housing market in Europe.

While the report argued that the continent's "one size fits all monetary policy" had increased imbalances in the eurozone countries.

Home prices in San Francisco jumped by more than half since 2012 and the report said that San Francisco seemed to be heading towards a housing bubble.

By contrast, prices fell or stagnated in Hong Kong, which was in the midst of a correction, New York and Singapore over the last year.

Home values in the US city of Chicago were in the rare category of being undervalued.

Housing bubble risks rise 50 per cent since 2011

UBS said house prices in cities ranked at risk of a housing bubble have increased by 50 per cent on average since 2011.

The report defined a bubble as a substantial and sustained mispricing of an asset and said a bubble cannot be proven conclusively unless and until it bursts.

It also compared current price-to-income and price-to-rent ratios.

Price-to-income ratios in London, Paris, Singapore, New York and Tokyo were more than 10.

Vancouver and Zurich had the highest price-to-rent ratios.

Last year, Australia's Treasury secretary John Fraser said that Sydney was "unequivocally" in a housing bubble.

Former Reserve Bank governor Glenn Stevens said around the same time that parts of the Sydney housing market were "crazy".