The gap could widen further, it says, sending more and more people into negative equity as they continue paying a mortgage which is worth more than the value of their home, and this is set to worsen considerably over the coming months.

The IMF said that the UK housing market is even more overvalued than the US market which was just 10 per cent too high; the American economy is now teetering on the edge of a recession as a result of repossessions and the slump in house prices.

According to a number of recent house price surveys, the last six months have seen house values in the UK fall at their fastest rate since the early 1990s, and the warning from the IMF implies that this is only going to get worse in the coming months.

If its predictions are correct, and houses come down in value by a third as the credit crisis takes its course, the current average house price of £196,000 will tumble to just £137,000. In the South East, where homes are typically worth an average of £400,000, homeowners could find their investment is worth just £280,000.

Despite lower house prices as the decade-long housing boom comes to a sorry end, first time buyers will not necessarily suddenly find themselves on easy street with a leg up onto to the property ladder, because mortgage lenders are withdrawing their home loans at an increasingly rapid rate.

Yesterday morning there were 4,754 mortgage deals available, which had dropped to 4,329 by the end of the day, according to the Daily Mail.

Based on such sobering findings, the IMF suggests that the “response of monetary policy to changes in the housing sector should vary depending on the level of development of mortgage markets.” but that it should have acted sooner in the housing boom before house prices shot up so steeply.

However, a World Economic Outlook report titled ‘Managing Housing Boom-Bust Cycles’ highlighted that there are doubts about whether or not monetary policy action taken now will be able to “smooth the impact on the broader economy of developments in the housing markets”.

The WEO report also noted the importance of recognizing that “monetary policy must be complemented by regulatory policies to limit risks of unsustainable house price bubbles because of imprudent lending practices.”

© Fair Investment Company Ltd