Interest rates need to go above 8 per cent to control booming house prices, according to a leading economist.

Martin Weale, director of the National Institute of Economic and Social Research – which advises both the Treasury and the Bank of England – said that unless the property market is restrained it will suffer a crash.

His warning follows the release of new figures from the Department for Communities and Local Government showing that the annual rate of growth in house prices surged to 10.9 per cent in January - up from 9.9 per cent in December.

Mr Weale is concerned that homebuyers are too reliant on property for financial security during retirement and are failing to save for a pension or make other investments. He says the problem needs to be addressed urgently by hiking interest rates.

The Bank of England base rate has already jumped three times since August to 5.25 per cent, its highest for six years. Further substantial increases would cause enormous strain for the 11.6m British homeowners with mortgages.

But an increase in rates is essential to stabilise the market, according to Mr Weale. “10 per cent might bring the boom under control or possibly 8 per cent would be enough to do it,” he said. “But a quarter-point here or there is not going to do it.”

Increasing base rates from 5.25 to 8 per cent could mean the cost of a typical £150,000 repayment mortgage at 2 per cent above base rising from £1,084 to £1,363 a month.

Mr Weale was one of the Treasury’s “wise men” responsible for setting interest rates before the Monetary Policy Committee was created in 1997.

He said: “The UK property market, in terms of its implications for the economy as a whole, is something of a disaster.

“It would be nice if the Government thought about this, instead of regarding it as an issue to be left to the Bank of England.

“I think it's a bubble and I think it could carry on for quite a long time. People don't bother to save because they rely on rising house prices to give them wealth without lifting a finger.

“That means when they get to old age they won't have enough to live on, or they will have to withdraw equity from their houses to keep going.”