Property prices in Britain may be up to 30% above their equilibrium value, suggest the latest findings by the National Institute of Economic and Social Research.
According to the Institute's latest economic review, properties in the UK are at the moment about 30% overvalued.
With this in mind, the main risk to economic growth over the coming years is a decline in house prices, the Niesr says.
If prices fall, they could end up knocking up to 25 basis points off annual GDP growth between 2005 and 2008, the Niesr review warns.
To soften the blow, the Bank of England should raise interest rates from 4.5% to 5% when it meets next week, say the NIESR as this would slow down inflation.
The independent research institute believes the Bank's monetary policy committee's approach to increasing interest rates has so far been a "rather leisurely tightening of monetary policy".
The MPC's decision to increase rates by quarter of a percentage point has done little to ensure inflation will not rise sharply, NIESR says.
By raising interest rates by half a percentage point at the next meeting in August, the MPC could put a dampener on inflation, it adds.IFAonline
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