Rapidly increasing house prices pose a "deep, deep" threat to Britain's continuing economic recovery, Bank of England Governor Mark Carney warns today.
UK prices are soaring by more than 10 per cent a year as the number of homes built fails to keep up with demand, potentially creating a new housing bubble.
Mr Carney, who succeeded Sir Mervyn King as Governor last year, pointed out that his home country of Canada builds nearly twice as many houses than the UK, despite having half the population. "There are not sufficient houses built in the UK," he said in an interview with Sky News.
But he said there was little they could do about the "deep, deep structural problems" in the housing market, with demand for homes outstripping supply.
In his interview he said the Bank of England was watching to ensure the banks had enough capital to withstand the risks involved.
They were also checking lending procedures to try to ensure that mortgages were only issued to people who could afford them.
"By reinforcing both of those we can reduce the risk that come from a housing market that has deep, deep structural problems," he said.
Nevertheless, he said that there was evidence that large value mortgages - with loans of more than four times a borrower's salary - were on the rise again, with the risk that they could destabilise the economy.
"The biggest risk to financial stability, and therefore to the durability of the expansion - those risks centre in the housing market and that's why we are focused on that," he said.
"We don't want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term.
"We would be concerned if there were a rapid increase in high loan to value mortgages across the banks ... we've seen that creeping up and it's something we're watching closely.
Ultimately, he said, the real problem lay in the shortage of homes - with the UK building half the number of new homes that were being built in his native Canada, despite a much bigger population.
"The issues around the housing market in the UK...is there are not sufficient houses built in the UK," he said.
"(There are) half as many people in Canada as in the UK, (but) twice as many houses are built in Canada every year than in UK."
Housing Minister Kris Hopkins said: "In 2010 we inherited a broken housing market, but our efforts to fix it are working.
"We've scrapped the failed top-down planning system, built over 170,000 affordable homes, and released more surplus brownfield sites for new housing.
"We've also helped homebuyers get on the housing ladder, because if people can buy homes, builders will build them.
"Housebuilding is now at its highest level since 2007 and climbing. Last year councils gave permission for almost 200,000 new homes under the locally-led planning system, and more than 1,000 communities have swiftly taken up neighbourhood planning. It's clear evidence the Government's long-term economic plan is working."
Mr Carney surprised some analysts last week when he played down the prospects of an early rise in interest rates - despite the fears of a housing market bubble.
There is also evidence of a return to the pre-crisis housing market, where people could get a mortgage at four times their salary only to struggle to meet repayments.
Additional reporting by Press Association