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Negative interest rates are inflating real estate prices. These cities are at risk of a bubble

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London (CNN Business)Even as the Brexit chaos helps to deflate London's real estate bubble by undermining the city's status as a financial capital, record low interest rates are pushing prices in other European cities to dangerously high levels.

The greatest risk of a real estate bubble currently exists in the southern German city of Munich, according to a new report by analysts at Swiss bank UBS. Amsterdam is not far behind, while Paris and Frankfurt — home to the European Central Bank — have moved into the "bubble risk zone," which means that prices could fall abruptly after rising steadily for years.

Hong Kong, and Canada's Toronto and Vancouver, are also in bubble territory, according to the report.

Now in its fifth year, the UBS Global Real Estate Bubble Index analyzes residential property prices in 24 major cities by examining trends in the relationships between prices, incomes, rent costs, economic growth and construction activity.

Brexit has hurt London's standing as an investment magnet and made other big global cities relatively more attractive. They are drawing companies and professionals worried about the UK's departure from the European Union.

Still, low interest rates have played an even bigger role in boosting real estate valuations in countries that use the euro, one of the report's authors, Matthias Holzhey, told CNN Business.

While rate increases, a typical trigger of a housing market correction, are not expected any time soon, weak economic growth in the region would make things "fragile," said Holzhey, who is head of Swiss real estate investments at UBS.

The European Central Bank in September pushed interest rates deeper into negative territory and announced a fresh stimulus package to kickstart flagging economic growth. But loose monetary policy has done little to boost borrowing and spending by businesses and consumers. Instead, owners of financial assets have benefited, borrowing heavily at very low costs to pour money into property or stocks in the hunt for better returns.

With the exception of Milan, cities in Europe exhibited the strongest price growth of any surveyed over the past year, UBS found.

Munich was at the greatest risk of a real estate bubble, while Frankfurt was the only city to see prices rise by double-digit percentages, which were common globally in previous years, the report found. Frankfurt had been "very cheap compared to London and other cities," said Holzhey.

Even though building activity in Frankfurt hit a record high in 2017, population growth has outstripped new supply, leading to an 80% jump in real price growth over the past decade, according to the report.

By contrast, prices fell more than 5% over the previous year in Sydney, Vancouver and Dubai, driven in part by regulations, such as taxes on foreign buyers and fees charged to owners who leave properties vacant.

UBS also expects an increase in housing market regulations in Europe, Holzhey said. "They usually come at the peak," he said.

This was partly to address low affordability, which poses one of the biggest risks to property values in urban centers, the report added.

London still unaffordable despite Brexit

Brexit, which gave rise to uncertainty about the city's future standing in Europe, had weighed on London property prices, said Holzhey.

At the time of the Brexit referendum just three years ago, London was Europe's most "unaffordable" city following a 50% surge in prices between 2012 and 2016, he said.

Although prices are 10% off their 2016 peak, the city's housing market remains overvalued. "Despite the recent price decline, even a highly skilled employee needs to work 14 years to buy a 60m2 [650 square feet] flat near the city center," the report finds.

According to Halifax, London homeowners spend almost half of their disposable income on their mortgage.

Still, UBS isn't writing off the London market, which could prove attractive to foreign buyers because of the weakness of the pound.

"If Brexit uncertainty goes away foreign demand will return," Holzhey said.