House prices are 30% too high in the UK and could soon collapse, the International Monetary Fund said yesterday.
After a decade-long housing boom, it fears Britain is one of the most vulnerable countries in the world to a devastating price collapse.
>> Crisis map: Are you a risk?
In a further blow, the Bank of England warned that the mortgage meltdown is going to get even worse. The number of mortgage deals has collapsed by 70% since last summer's credit crunch.
It added that mortgage availability is set to worsen with 43% of lenders planning to cut back over the next three months.
The IMF said the UK has experienced one of the world's 'largest unexplained increases in house prices' over the past decade. If its doom-laden prediction is correct, an average home - currently worth £196,000 - could actually be worth just £137,000.
For homes in the South East, typically worth £400,000, the drop will be even more severe, down to roughly £280,000.
The warning comes after 12 years of rocketing house prices. When the boom began in 1996, the average price was just £60,000.
The IMF's World Economic Outlook said it has identified a 'house price gap', the difference between the price of a home and the country's economic fundamentals.
They include salaries, interest rates and population growth.
Ominously, a similar IMF report at the end of 2007 found the U.S. housing market - currently in meltdown - was just 10% too high.
The Bank of England's regular survey of the country's biggest lenders, published yesterday, shows they expect the mortgage crisis to get even more serious. Lenders said more mortgage deals will disappear and the rest become harder to get because of increased rates, larger deposits or tighter checks. Yesterday morning there were 4,754 mortgage deals. By the end of the day, that had dropped to 4,329, according to the information firm Moneyfacts.
Before the credit crunch crippled lenders' ability to borrow money, there were more than 15,500 deals on the market. Of yesterday's casualties the biggest changes were Woolwich, which increased the rates on its lifetime tracker mortgage for the second time in a week.
For people with only a small deposit of 5%, it will now charge a rate of 7.24%.
In a highly unusual move, Skipton introduced a £799 fee for anybody taking out a mortgage with the building society on standard variable rate.
Traditionally, 'SVR' mortgages have been free because they are much more expensive than the cheap, short-term deals.
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