The study by economists at PricewaterhouseCoopers says this will then allow house prices to readjust back towards levels relative to incomes.
The study revealed that house price overvaluation varies significantly by region, reflecting sharp differences in the balance of supply and demand throughout the country.
PwC found overvaluation ranges from around 30% in London to almost zero in Scotland and the north of England.
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.’
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