The UK house prices are currently overvalued by at least 20% when compared with long term averages, according to credit rating agency, Fitch. The agency also says that house prices have outpaced incomes over the past ten years.
In addition, the high levels of debt in the UK means that the UK economy is particularly vulnerable to interest rate rises, the third most vulnerable of the sixteen countries studied by Fitch.
Fitch assessed the countries based on a range of indicators of household debts and house price valuation measures.
The study found that the economies at risk from an inflated property market were New Zealand and Denmark, followed by the UK. In these countries, variable rate mortgages are common, while house price increases have outstripped rises in average salaries.
In the least vulnerable countries, Italy, Germany and Japan, variable rate mortgages are less prevalent, while wages have managed to keep pace with property prices.
According to Halifax figures for June, the average home in the UK has risen from £68,000 in 1997, to £196,500 this year. Meanwhile the gross median salary has risen at a much lower rate, from £16,700 in 1997 to £23,250 in 2006.
The report added that there is evidence of oversupply in housing, with more property being built in countries such as Ireland and Spain. This is not the case in the UK though, with housing shortages in some areas.