House prices in Britain are among the most exposed in the developed world to a severe slump thanks to the runaway scale of the property boom of the past decade, the International Monetary Fund said yesterday.

In the latest bleak warning over the threat to the economy from a housing market bust, a the IMF identified Britain, with Ireland, France and the Netherlands, as the countries most vulnerable to painful correction in overvalued house prices.

Britain is heavily exposed to an abrupt adjustment in property values because the scale of the huge gains that homeowners have enjoyed means that at least 30 per cent of these cannot be justified by fundamental factors like demand for housing or incomes, the study concludes.

“It is difficult to account for the magnitude of the run-up in house prices,” it said.

The warning from the IMF will fuel fears that Britain could follow the United States in enduring a severe house price crash, with severe repercussions for the wider economy.

However, the IMF - which has issued several past alerts about a heavily overvalued UK housing market - also tempered its warning, noting that since soaring property prices here have not sparked a housebuilding boom, as in other countries such as Spain, the economy was not in jeopardy from this also now imploding.

The Fund’s findings came in an advance chapter of its twice-yearly World Economic Outlook that also called for central banks to take greater account of house prices in their interest rate decisions.

Much easier access to mortgage finance in rich economies such as Britain has multiplied the scale of the housing market’s influence on prospects, and its role in transmitting the effects of interest rate changes, the IMF found.

Homeowners’ greater ability to borrow against their property’s value means that rising house prices could have a stronger effect in boosting consumer spending, for example.

The IMF argued that this meant that economies with highly developed mortgage finance markets could be made more stable if interest rates “respond more aggressively to movements in house prices, particularly when house prices move rapidly, or out of line with normal valuation ranges”.

This suggests a stronger case for the Bank of England to react to a severe housing downturn with steep base rate cuts. The Bank has repeatedly sought to play down the impact of house price trends on consumer spending.

The IMF report also argued that central banks should consider dampening excessive house price booms with higher interest rates, although it insisted it was not recommending a formal target for house prices be created.

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