BUSINESS leaders have warned of overheating in the housing market, saying interest rates will need to rise early next year.

The Confederation of British Industry (CBI) made the call after raising its growth forecast for this year from 2.6 per cent to three per cent.

However, it also highlighted concerns the recovery could be derailed by uncertainty around the general election, urging politicians to push ahead with boosting the supply of homes and taking decisions on major infrastructure projects.

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Director-general John Cridland said property values were expected to rise by 8.2 per cent this year, and 5.1 per cent next year.

He said: "We have to remain alert to the risks posed by unsustainable house price inflation, and the Bank of England Financial Policy Committee is poised to act when necessary.".

Mr Cridland declined to say whether the Governments Help to Buy scheme, which offers guarantees so that people without large deposits can get mortgages, should be wound down.

But he suggested the initiative was only having a marginal impact on the market, with the overwhelming majority of purchases in which it is used taking place outside London.

He added that it was crucial for Governments to focus on increasing housing supply.