The UBS Global Real Estate Bubble Index, designed to track the risk of housing bubbles in global financial centres, places Sydney as fifth riskiest.
Toronto tops the index in 2017, but all sub-indicators "point unequivocally" to elevated risk in the Sydney housing market.
Sydney’s housing market has been overheating since the city became a target for Chinese investors several years ago, the index again noted.
"Low interest rates, rising wealth and exuberant expectations also buoyed local demand.
"So valuations soared and pushed the market into bubble risk zone," it concluded.
Since 1980 the average real annual price rise in Sydney has been 3.5 percent, the highest among all select cities.
"Real prices again shot up 12 percent in the last four quarters and are now 60 percent higher than in 2012.
"Incomes increased by a meagre 2 percent in infation-adjusted terms. Tax breaks and interest-only loans are whitewashing the worsening affordability for the time being."
According to the UBS Global Real Estate Bubble Index, the bubble risk in select world cities has increased significantly over the last five years.
Real house prices of those metropolises within the bubble-risk zone have climbed by almost 50% on average since 2011.
In the other financial centres prices had only risen by roughly 15%.
"This gap is grossly out of proportion to the differences in local economic growth and inflation rates," the report noted.
Bubble risk seems greatest in Toronto.
Stockholm, Munich, Vancouver, Sydney, London and Hong Kong all remain in risk territory, with Amsterdam joining this group after falling into 'overvalued' territory last year.
Valuations are stretched in Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Tokyo and Geneva as well.
In contrast, property markets in Boston, Singapore, New York and Milan seem fairly valued, while Chicago remains undervalued, just as it was last year.
Sydney ranked fourth most riskiest in the 2016 report which also advised “Sydney’s housing market had been overheating since the city became a target for Chinese investors several years ago."
The latest report noted in Munich, Toronto, Amsterdam, Sydney and Hong Kong, prices rose more than 10% in the last year alone.
"Annual price-increase rates of 10 percent correspond to a doubling of house prices every seven years, which is not sustainable.
"Never-the-less, the fear of missing out on further appreciation predominates among home buyers.
"After all, the price increases appear rational, for three reasons," it suggested. First, financing conditions in many cities are now more attractive than ever before, it noted. Second, the global increase in wealthy households seemingly creates constant demand for the most attractive residential areas. Third, building activity cannot keep pace with this demand.
"Expectations tend to be prone to exaggerations in boom phases," the annual report advised.
It suggested the optimistic projections of the trends "created ever-greater price fantasies."
However, should sentiment change or interest rates increase, a correction is practically inevitable.
"In the past, rising interest rates almost always triggered a crash in housing markets.
"In addition, the dependence of prices on international ows of capital represents an incalculable risk.
"Plus, once demand fell, even the low growth in supply would no longer provide an anchor," it concluded.
Vastly overvalued housing markets have historically been associated with a significantly heightened probability of correction and greater downside than housing markets whose prices developed more in line with the local economy, UBS advised.