He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks.

The Federal Reserve Chairman’s warning, his strongest yet, sent share prices falling on Wall Street, at one point knocking 66 points off the Dow Jones industrial average. By the close the Dow had recovered to 10,397.30, down 53.30 points.

Traders said that Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market, for fear that a crash there would hit consumers and push the economy into recession. When the share price bubble finally burst, Mr Greenspan cut Federal interest rates to 1 per cent, triggering the flood of cheap loans for housing. He fears that rate increases set in train as the economy recovered could throw the housing market into reverse and suggested that the twin deficits would now restrict his room to manoeuvre if a house price downturn hit spending. Asset prices were, he complained, driving monetary policy more than ever before.

Share traders were also worried by an unexpectedly sharp fall in the University of Michigan consumer confidence index, a small but influential barometer, which fell for the first time in three months. The expectations index slid from 88.5 to 76.9.

Rob Carnell, of ING Bank in London, said that Mr Greenspan’s warning was an eerie reminder of a successful campaign last summer by Mervyn King, Governor of the Bank of England, to “use rhetoric rather than interest rates” to cool an overheating homes market. Britain has avoided a crash thus far.

On traditional tests, about a third of US local homes markets are now markedly overpriced. Over the past five years, the average US house price has risen by 50 per cent, half the rate of increase in UK prices in the five years to summer 2004. However, prices have risen more sharply in favoured areas, such as New York, and more than doubled in a few cities, such as San Diego.

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