Hong Kong remains one of the least affordable cities to buy a flat despite recent price declines and faces the risk of a "sharp correction" as interest rates go up, according to a report published on Friday.

UBS noted that the SAR saw the biggest decline in home prices compared to 24 other major cities it analysed, down four percent in the 12 months from mid-2021.

But the Swiss bank said flat prices here continue to be in bubble territory, as indicated by factors such as the decoupling of prices from local incomes and rents.

It pointed out that it would take a skilled worker around 25 years to be able to afford a 650 square-foot flat – the longest duration of any city included in the report.

The bank also warned that Hong Kong is vulnerable to a sharp correction if interest rates continue to rise, noting that it has the second highest price-to-rent ratio after Munich.

"Investors anticipate being compensated with capital gains for very low rental yields," explained the report.

"If these hopes do not materialise and expectations deteriorate, homeowners in markets with high price-to-rent multiples are likely to suffer significant capital losses."

The study found that Toronto carried the highest bubble risk among the 25 cities, followed by Frankfurt, Zurich, Munich and Hong Kong.

Meanwhile, the bank pointed out that Singapore had seen strong growth in both home prices and rent during the period analysed, jumping 11 percent and 16 percent respectively.

"Following construction delays, pent-up demand for housing space from the pandemic and strong expat interest are driving prices up," it said.

However, it noted that Singapore's home prices are only "slightly overvalued", as the faster growth in rent prevented drastic imbalances.