The International Monetary Fund said UK policymakers must consider taking action early to stop the country's housing market, particularly in London, from spiralling out of control.
While praising the strength of the UK's economic recovery, which the IMF predicts will see 2.9% GDP growth in 2014, the organisation said sluggish productivity and the housing market were two significant risks.
House prices are rising in all regions of the UK amid cheaper mortgages because of the Bank of England's record-low base rate of 0.5% and a dearth in housing supply. A revival in the property market is a large driver of the wider recovery.
"House price inflation is particularly high in London, and is becoming more widespread," said the IMF in the conclusion of its annual assessment of the UK economy.
"So far, there are few of the typical signs of a credit-led bubble.
"Nonetheless, a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks."
The IMF suggested that the Bank of England's financial policy committee limit the number of high loan-to-income mortgages lenders can issue, with the potential to impose an outright cap if this failed to limit risky lending.
Moreover, the IMF said banks could be forced to hold onto more protective capital against their lending as an extra buffer against defaults.
And the Treasury should keep an eye on its Help to Buy scheme to make mortgages cheaper if there is a sharp increase in its use.
Though the IMF said the fundamental problem is one of supply and pushed for more house building.
Official figures show mortgages won through Help to Buy account for just 1.3% of the whole market.
The Office for National Statistics (ONS) said the average price of a UK home rose by 8% over the year to March 2014, hitting £252,000. In London this increase was 17% to an average of £459,000.
"The objective of macroprudential policy is to address systemic financial risks, not house price growth," said the IMF in its report.
"Some measures have already been taken. In particular, the Funding for Lending Scheme has been refocused towards businesses, with emphasis on SME loans, while household lending is no longer eligible for additional borrowing allowances.
"Underwriting standards for owner-occupier mortgages have been tightened to ensure better borrower protection.
"But in an environment where expectations of capital gains can quickly drive up household indebtedness—and thus systemic risk for financial institutions—more policy action is warranted."
Chancellor George Osborne said he agrees with IMF head Christine Lagarde in her warnings on the housing market.
He said that both he and policymakers are alert to the risks of rising house prices, particularly that of higher debt and the potential for defaults when interest rates rise.
"I have given the Bank of England tools to do the job, and they should not hesitate to use those tools if they see these developments turning into a risk to the British economy," he told BBC radio.
The Financial Conduct Authority (FCA) has already imposed tougher affordability tests for lenders to apply to prospective borrowers, to make sure applicants are able to make repayments in a number of different scenarios, such as higher interest rates or a reduction in income.
And two of the UK's biggest mortgage lenders, Lloyds Banking Group and Royal Bank of Scotland (RBS), said they would only lend out four times the income of the applicant on property loans of over £500,000.