London house price growth is showing signs of a bubble, while the rest of the UK has returned to normality after the credit crunch, according to a closely watched report.

The EY ITEM Club special report on housing, released today, said income multiples are back to pre-financial crises levels in the capital with home buyers taking on ever larger mortgages.

It added that “caution on the part of borrowers should prevent a serious problem developing”, but also called on policymakers to watch developing trends “closely”.

The news comes ahead of a decision on interest rates by the Bank of England this week.

Analysts said they should remain pegged at a historical low of 0.5 per cent but that upward pressures could mean action soon.

Andrew Goodwin, senior economic advisor to the ITEM Club, said the Bank should consider restricting income multiples, but not curtail the government’s controversial Help to Buy scheme.

“Some have suggested that Help to Buy should be altered or cancelled but this is a red herring,” said Mr Goodwin.

“The scheme has only a very limited impact on the capital and withdrawing it could risk choking off the recovery in housing transactions across the rest of the UK without solving any of London’s issues. The FPC should instead be looking to limit income multiples.”