Wealthy foreign buyers' desire for high-end London property risked creating a housing bubble in the British capital, an economic forecasting group said this week as it called for measures to cool the market.
An influx of buyers had created bubble-like conditions in London, the EY Item Club said in a report published on Monday.
That report came as think tank Civitas estimated 27 per cent of new homes in central London went to British buyers and more than half to buyers from Singapore, Hong Kong, mainland China, Malaysia and Russia.
EY Item Club economist Andrew Goodwin said: "House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing … But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern."
Real estate agents, politicians and the Royal Institution of Chartered Surveyors have said that Britain was risking a repeat of the 2008 property crash.
The business secretary, Vince Cable, has warned of the dangers of a housing bubble. Last week he said: "We cannot risk another property-linked boom-bust cycle which has done so much damage before."
The governor of the Bank of England, Mark Carney, has played down fears of a bubble. He said that while prices were rising quickly the acceleration was "from quite a low level".
The Item Club study showed that British house prices were rising at a rate of 8.4 per cent this year. It predicted they would rise 7.3 per cent next year and about 5.5 per cent in 2016.
Prices are growing faster in London. Office for National Statistics data showed average prices in the capital increased 11 per cent in the year to November 2013. That increase dragged the national average up from 3.5 per cent to 5.4 per cent.
The strongest growth is among the most luxurious homes, as rich foreigners take advantage of the fall in the value of the British currency. The prices of prime London property, defined as homes that cost more than £1,000 per square foot, are now 27 per cent above their 2007 peak, according to estate agent Savills.
The Item Club study said soaring prices at the top end were trickling down throughout the market and predicted that the average London home would cost more than £600,000 by 2018. That would be 3.5 times the average in Northern Ireland and 3.3 times the average in the northeast of England.
The report said international interest in London property had been "very high due to a combination of heightened risk elsewhere in the world, low returns on other assets such as bonds, equities and cash, and a weak pound, which has made London properties cheaper for foreigner buyers".
The report added: "Arguably, it would be more appropriate to treat it as an investment market, rather than a residential market."
Think tank Civitas said London property purchases by foreigners had distorted house-building priorities.