House prices 'overvalued by 30 per cent'

House prices are 30 per cent over-valued and could experience an early Nineties-style crash, a leading economics think tank warns today.

The National Institute for Economic and Social Research urged the Bank of England to raise interest rates by an aggressive half a percentage point next week to cool the property market, warning that a price collapse would dent economic growth in future years.

" House prices are around 30 per cent above their equilibrium level [and] it is possible they might fall rapidly, as they did after the last two house price bubbles, rather than moderately as is our baseline forecast," the institute said.

The bank has raised rates four times since November, with back-toback quarter point hikes in May and June, partly to cool rampant house price inflation and curtail consumer debt. Most economists expect another quarter-point hike to 4.75 per cent next week, but the report said more drastic action from the monetary policy committee was needed.

The institute said it assumed the Bank would welcome a correction in house prices, even though a crash would probably shave on average a quarter percentage point off economic growth over the next four years.

The last two house price booms in Britain were both followed by crashes.