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Royal family, Bank of England warn of housing 'shock'

Fears of property bubble in the U.K have reached feverish levels after warnings from three pillars of the British establishment: the Bank of England, the Office for Budget Responsibility (OBR) and a member of the British royal family.

Heir to the throne, Prince Charles has said the unsustainable rises in London house prices is causing a brain drain, as young people cannot keep up with rent payments.

(Read more: Average London house double UK average at $750,000)

Rows of houses stand on Egerton Crescent in the Kensington and Chelsea borough of London, United Kingdom.
Chris Ratcliffe | Bloomberg | Getty Images
Rows of houses stand on Egerton Crescent in the Kensington and Chelsea borough of London, United Kingdom.

Speaking at a housing conference in London on Wednesday, the prince said that in just six years' time, the average London house price will have risen 40 percent to £650,000 ($1.08 million).

"This isn't sustainable and risks driving away talented young individuals who are starting their careers in London and spending most of their income on rent. Home ownership for this generation is seemingly becoming further and further out of reach," he said.

(Read more: As UK regains strength, time to hike rates? )

In a new report from his charity, the Prince's Foundation for Building Community suggested mid-rise buildings could be the solution.

London property prices soared in January to almost double the national average, as the city's buoyant housing market continues to inflate. Real estate in the U.K.'s capital rose 13.2 percent in January compared with a year earlier, dwarfing the 6.8 jump seen across Britain as a whole.

Houses in London have a typical price tag of £458,000, nearly 23 percent higher than before the financial crisis, according to figures released by the Office for National Statistics on Tuesday.

The prince's warning comes as the Bank of England has said it will "remain vigilant to emerging vulnerabilities" and discussed plans to stress test U.K. banks to see how they would cope with rising interest rates and the threat of a housing crash.

(Read more: UK inflation sinks to 4-year low, house prices surge)

"Given the increasing momentum, the Financial Policy Committee (FPC) will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated action if warranted," the bank said in a statement released on Thursday, which contained notes from an FPC meeting held earlier this month

"A key part of the scenario would examine the resilience of the banks to a housing market shock and to a snap back in interest rates," the bank added.

The Treasury's independent watch dog has also entered the debate, as chairman of the OBR, Robert Chote told British MPs there are some "bubbly components" in the housing market.

"'With very rapid house price increases in some parts of the country you might see bubbly activity where people are willing to buy stuff off plan or not intend to live in it,' Chote said.

(Read more: A Victorian solution to London's housing crisis?)

Former Monetary Policy Committee member Andrew Sentence told CNBC rising interest rates should help ease the surge in property prices.

"We have not had 0.5 percent interest rates before and at some point we need to make the change to a more normal rate of interest rates, I think that would help cool the house market," Sentence, who is currently senior economic adviser to PwC, told CNBC.

"We don't want to totally damp down the housing market, we want to see housing activity increase. We want to see more house building, we want to see people moving houses, but it is the increase in prices that is heading up to close to 10 percent across the country and moving higher than that in London that's the problem," he said.

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