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IMF warns UK of potential housing crash

In its annual assessment of the British economy, the International Monetary Fund said that further interest rate rises were needed to prevent a crash in the housing market.

Warning that the UK government needed to cut its spending deficit, the IMF said, "A gradual but early tightening of monetary policy is the best means for achieving a soft landing in consumption and the housing market."

However, the IMF praised the UK's economy for performing "enviably" while other major economies have struggled. "In the face of sizeable global shocks over the last few years, the performance of the UK economy, supported by stimulative macroeconomic policies, has been enviable," the IMF said.

Earlier this week, the think tank ITEM Club, which uses the same economic model as the Treasury, said Mr Brown would have to raise taxes in the next couple of years to meet a rule on government borrowing, which states that government should only borrow to invest over the economic cycle.

The IMF similarly predicted the Chancellor would likely break his golden rule, saying the deficit should now be brought down, not only to meet his own fiscal rules but also to reduce the need for further rate rises and so lowering the risk of a housing market crash.

"The main risk relates to an abrupt adjustment of house prices and household balance sheets, with possibly protracted effects on consumption," the IMF said.

But the IMF conceded, "assessing the likelihood of such a hard landing scenario is difficult."

The Bank of England raised rates by a quarter percentage point to 3.75% in November, and some economists are expecting rates to rise further early next year.