House prices in Britain are overvalued by about 30%, said the HSBC bank.

The report from the bank’s chief UK economist, which warned that the incoming property downturn would cause the sterling to plummet and force the Bank of England to slash interest rates, came as official data revealed the fastest fall in London house prices for more than two years.

The findings follow those of the International Monetary Fund (IPC) which last month calculated that homes in Britain were overpriced by up to 40%.

The credit squeeze would now prove the trigger for Britain’s housing slowdown, HSBC said. Higher mortgage costs would spark repossessions and make buy-to-let a poor investment. ‘A major source of demand in the past couple of years could then turn into a major source of supply’, the report said.

A slowdown in residential construction and consumer spending would then follow, causing growth to fall to its lowest level in a decade, the report said.

HSBC has predicted that interest rates will fall far lower than the market expects, from 5.75% at present to just 4.5% by the start of 2009, while sterling is tipped to tumble against the dollar to below $1.80.