We cannot have the nice, gentle slowdown in house prices that some are predicting because things have got too over-stretched Sabina Kalyan Capital Economics

Capital Economics said that houses were substantially overvalued and there would be a sharp "correction" which could trigger a recession in the UK.

The report's author Sabina Kalyan said that she expected prices to fall by a fifth over the next four years.

But she said: "In the absolute worst-case scenario prices could fall by 30%.

"Our view is that we cannot have the nice, gentle slowdown in house prices that some are predicting because things have got too over-stretched."

	:	UK property market
The house price boom

Rise and fall

The stark warning came as the property website Rightmove reported that property prices in London fell by 2.6% in November - the biggest monthly fall of the year.

I think eventually what will start to turn house prices round is people starting to think just that houses might be cheaper if they wait six months or a year to buy Martin Weale Director, NIESR

But Rightmove said that, overall, house prices in England and Wales rose by 0.6% in November, taking the average asking price to �156,084 ($248,035). The rise was 22.1% over the year.

The increase is much lower than the Halifax and the Nationwide building society have reported.

Despite the gloomy warning from Capital Economics, the consultancy said it did not expect the sharp fall in prices to come immediately.

It is predicting an increase of 20% in house prices during 2003.

But it then is expecting a fall of 5% in 2004, a 10% drop in 2005 and a 7% slide in 2006.

The falls would mean a 20% collapse in house prices from the peak to the trough and would wipe out all the gains in house prices since the second quarter of this year.

If the "worst-case scenario" of a 30% fall came about, then that would erase all the gains since the beginning of 2001.

Bad loans

Martin Weale, director of the National Institute of Economic and Social Research said he viewed the predictions with a certain amount of caution.

"House prices have risen sharply, in part that is because we've had very low interest rates.

"They may well weaken again but that's not to say that they'll go back to their starting point.

"I think eventually what will start to turn house prices round is people starting to think just that houses might be cheaper if they wait six months or a year to buy," he told BBC Radio 4's Today Programme.

The international investment banks Goldman Sachs and Commerzbank have said UK house prices are overvalued by 20%.

And the overheated housing market has prompted ratings agency Standard & Poor's to put the UK on its list of countries where banks face the prospect of rising bad loans.