According to the Bank of America (BoA), there is a one-in-five chance that the UK residential housing market will suffer a severe crash in the next year.

BoA estimates that house prices are currently overvalued by 20% and says that leading indicators and its own economic analysis both point to a significant slowdown in the market later this year, and into 2008. Rather than an actual fall in prices, BoA believes it will take the form of very subdued house price inflation until 2010.

But Matthew Sharratt, an economist at BoA, warned that a rapid drop in sentiment could lead to a more abrupt adjustment over a shorter period of time. Property developers, Barratt Developments and Bovis Homes, have indicated recently that the five interest rate rises since the end of 2006 have succeeded in slowing growth in the housing market.

Sharratt argues that the rising cost of borrowing has “not yet had much of a discernible effect on the housing market”, and believes that “much of the impact from higher interest rate rises is still in the pipeline”.

There have also been concerns that rising rates could hit the buy-to-let market, Sharratt said: “With the buy-to-let sector yet to be tested in a serious downturn, the risk remains that this sector could amplify any slowdown in the broader property market.”