UK house prices are at least 20% overvalued compared with their long term average, according to credit rating agency Fitch.
UK house prices are overvalued at least 20% according to Fitch
Fitch, which judges how risky debt is, looked at how house prices have raced away from incomes over the past decade.
High levels of debt make the UK economy one of the most vulnerable in the world to higher interest rates, it added.
Out of 16 countries examined, the UK economy was the third most sensitive to higher interest rates, Fitch said.
Fitch looked at a combination of economic indicators to see where house prices were overvalued and which economies were at risk if interest rates rose.
MOST VULNERABLE COUNTRIES
In addition, the group looked at what type of mortgage dominated the market.
Countries where variable rate mortgages are in vogue, such as the UK, would feel a greater impact from higher interest rates, Fitch said.
New Zealand and Denmark, which have both seen house price booms and increasing levels of personal debt, were the two most vulnerable to higher rates, followed by the UK.
At the other end of the scale, consumers in Italy, Germany and Japan were the least likely to suffer if interest rates rose and debt became harder to manage.
This is because consumers in these countries have not seen house prices or debt race away from incomes to the same extent as the UK.
Meanwhile, the Bank of England (BoE) said on Monday that UK mortgage lending had picked up sharply in June, indicating continued housing market growth.
Total mortgage lending rose by £9.6bn in June, up from £8.7bn in May.
The number of mortgages approved was the same in June as in May, with 114,000 new home loans given the go ahead.
The lending figures were stronger then most analysts expected.
"Mortgage lending is holding up well in the face of higher interest rates and mortgage approvals are still robust," George Buckley an analyst at Deutsche Bank said.
"We expect some weakening in these numbers towards the end of the year, but for now the market seems to be holding up well," he added.