Prof David Blanchflower issued the warning last night during a speech at the Royal Society in Edinburgh.
Blanchflower says in his speech that property in Britain is overpriced by 30%.
He warns that unless interest rates are cut, a 30% decline in house prices would be needed to maintain a more realistic house price-to-earnings ratio.
He adds: “In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years. I am not suggesting that such a drop will necessarily occur, but it may.
“My biggest concern right now is that the credit crisis will trigger a rapid downward spiral in activity. I believe that we face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occuring.”