Accountancy firm PricewaterhouseCoopers has claimed that UK house prices are overvalued by an average of 10 percent when compared to historical levels. PWC compared the current ratio of house prices to incomes with the long-term average and found that many areas of the country are experiencing price rises that are outstripping income growth by unusually high levels.

London prices are more than 30 percent higher than they should be according to the ratio, while homes in the South West and South East are overvalued by 20% and 14% respectively.

Other areas are also overvalued, including the East Midlands (13%), East Anglia (13%), Wales (11%), West Midlands (11%), and North West (8). In Scotland, the North of England and Yorkshire and Humberside the ratio is in line with long-term averages.

PWC warned that the current level of house price inflation is unsustainable in the long-term, and predicted it would slow down significantly in 2003 and 2004 as interest rates rise and growth in income slows down in relative terms. They suggested that a prolonged period of slow, or even negative, house price growth may be needed to restore house prices to equilibrium values in many regions, particularly in London and the South of England. However, PWC was not of the opinion that house prices were likely to fall in London and the South East, thanks to the current shortage of available properties.

Rosemary Radcliffe, chief economic adviser at PwC, said: "Recent rates of house price inflation are unsustainable except in the very short-term, and we expect a significant moderation of growth that will gradually restore house price to income ratios to more sustainable levels in the medium-to-long-term.

"But, given that affordability issues are the most pressing in southern regions where supply constraints are also most acute, we would be cautious about predicting a significant absolute decline in UK house prices of the kind that occurred in the early 1990s."

John Hawksworth, head of the macroeconomics unit at PwC, said: ""Despite the current strength of the housing market, we therefore expect only a relatively gradual rise in UK interest rates to around 4.5% by the end of 2002 and around 5% to 5.5% by the end of 2003."