Property market in peril with houses 'overvalued by 20 per cent'

The warning came from experts in debt and risk at the respected Fitch credit rating company who have placed an alert against the British economy.

They believe a combination of unsustainable house prices, record personal debt and rising interest rates has created a potentially explosive cocktail.

The Fitch research, which assessed 16 major economies, suggests that the current average house price of some £211,000 is overvalued by more than £40,000.

It says the problem stems from the fact that house prices have risen some 210 per cent in the last ten years, while incomes have grown by a much lower 53 per cent.

Consequently, it argues that only a property crash or - more likely - many years of stagnation can possibly bring prices back into line with what people can afford.

Such is the weight of household debt on mortgages, credit cards and loans that Fitch considers Britons are particularly likely to be tipped into the red by interest rate rises. It listed the UK among three

countries which it says are "most exposed to house price and interest rate shocks".

Just such a rate shock appeared more likely yesterday as the Bank of England reported a surprising surge in mortgage lending during June.

City analysts said the findings mean the Bank is likely to go for a sixth base rate rise in a year, taking it up a quarter point to 6 per cent.

An increase is expected later this year, although it could come as early as this Thursday.

Brian Coulton, head of global economics & Europe at Fitch, said: "Looking at every measure available, UK house prices are significantly overvalued."

People have coped with the growing chasm between income and property prices by taking on record mortgages.

But rising interest rates have squeezed household budgets.

Personal debt - including mortgages - is running at a record £1.3trillion, with interest rate repayments this year expected to top £100billion for the first time.

Mr Coulton said: "For most people interest rates have fluctuated around a comfort zone since 2000. But we now have a new situation of record household debt coupled with consistent increases in interest rates.

'If we start seeing base rates above 6 per cent that could have a pronounced effect. You are then talking about rising debt default, repossessions and bankruptcies.

"At the same time, you drive buyers, particularly first-time buyers, out of the property market. That is already happening to some extent. Historically, this group accounted for 30-40 per cent of purchases, but it is now less than 15 per cent.

"When your have a shortage of buyers that will cap prices."

He added: "We don't see a repeat of the 1990s crash, but it is certainly possible that price rises could be very low for a number of years in order to bring them back into line."

Looking at house prices alone, Fitch estimates that Britain is second only to France in terms of being overvalued. However, the British face a much bigger problem because high property prices here are fuelled by big mortgages.

New Zealand comes out worst in the "at risk" league because consumers there are carrying high debts while the base rate is above 8 per cent. The Danes, who typically carry even bigger debts than the British, are second in the league.

Fitch is among a growing list of analysts who have warned that UK house prices are dangerously overvalued.

Bank of England figures show mortgage lending increased at its fastest rate for three months during June, defying expectations that the market is slowing down.

Some £31.9billion was advanced during the month, the highest figure since March.