George Osborne has set out plans to fix Britain's housing market with beefed-up powers for the Bank of England and "radical" planning reforms designed to help build up to 200,000 new homes.
In his annual Mansion House speech, the Chancellor set out how the Bank's Financial Policy Committee (FPC) would be able to order restrictions on the ratio of mortgage loans compared to borrowers' incomes, or to the value of their house.
He also announced proposals, likely to prove controversial, for an "urban planning revolution" which would see councils forced to pre-approve brownfield sites for housing developments.
The FPC already has powers to recommend measures including caps on mortgage loan-to-value (LTV) and loan-to-income (LTI) ratios to regulators, to head off the threat of a housing bubble.
Separate remarks from Bank of England governor Mark Carney signalled these were likely to be deployed within weeks, as he warned the property market was "showing the potential to overheat", with prices up 10% in the last year.
But Mr Osborne said it was important that the Bank was able to act "independently of politics" and take action by itself. The new powers are expected to be in place by the end of the current Parliament next May.
"We saw from the last crisis the dangerous temptations for politicians to leave the punch bowl where it is and keep the party going on for too long," he said in last night's speech.
The Chancellor added: "I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market.
"I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust."
Mr Carney welcomed the measures as well as a separate part of the Chancellor's speech in which he set out plans to clean up London's vast foreign exchange market, with new criminal sanctions for traders who engage in abuse and malpractice.
But shadow chancellor Ed Balls said: "George Osborne is still failing to tackle the root cause of the housing crisis which is that we are not building enough homes to match rising demand."
Mr Osborne used his speech to highlight the strength of the recovery, with Britain growing faster than any other advanced economy, record numbers in work, stronger business investment and a lower budget deficit.
But he said the dangers facing the recovery including an "old and very familiar risk" from the housing market, with the need to build more homes and the cycle of financial instability caused by high household debt.
Mr Osborne said there was "no immediate cause for alarm" with house prices still lower in real terms than they were in 2007, and the rate of mortgage approvals slowing in the last couple of months.
"But we need to be vigilant for there are things on the horizon that should give us some causes for concern," he added.
He pointed to soaring prices in London, now starting to spread out of the capital, with mortgage loan to income ratios at new highs.
Mr Osborne said: "Does the housing market pose an immediate threat to financial stability today? No, it doesn't.
"Could it in the future? Yes, it could, especially if we don't learn the lessons of the past. So we act now to insure ourselves against future problems before they can materialise."
He reiterated that the Bank "should not hesitate" to act on the housing market "if they think it necessary to protect financial stability".
Mr Osborne's proposals will strengthen its power to act either by putting a cap on LTI or LTV ratios or put in place limits on the proportion of higher ratio, riskier home loans that lenders can offer.
Earlier yesterday, Business Secretary Vince Cable told BBC Radio 4's Today programme he was "appalled" that banks were lending mortgages worth up to five times borrowers' salaries - and indicated a stable level was "three or three and a half times".
Last week, the International Monetary Fund called for the UK to take "targeted and timely" measures to clamp down on risky mortgages.
State-backed lenders Royal Bank of Scotland and Lloyds Banking Group have already taken action to scale back high loan-to-income lending.
Elsewhere in the speech, Mr Osborne announced "radical steps" to reform planning rules, with the aim to provide permission for up to 200,000 new homes on brownfield sites.
He said: "This urban planning revolution will mean that in effect development on these sites will be pre-approved - local authorities will be able to specify the type of housing, not whether there is housing."
Under the plan, 90% of suitable land is expected to be covered by 2020 using these "local development orders" (LDOs).
It is intended to allow developers to start building sooner, saving them time and money. A £5 million fund will be set up to help local authorities create the first sites with LDOs.
The Government will also consult on new measures to enforce this approach, including allowing developers to apply directly to Whitehall if they feel councils have not done enough to remove planning obstacles on brownfield sites.
Mr Osborne acknowledged that previous planning reforms had been "hard-fought and controversial". Critics claimed the Coalition's national planning policy framework had left them powerless to stop damaging development in the countryside.
Former chancellor Lord Lawson said the FPC's powers to restrict mortgages are necessary as a backstop as banks lend irresponsibly because they feel they are "too big to fail".
The peer, who served in Margaret Thatcher's cabinet, said: "I do think it should be very much a last resort, a reserve power.
"The problem is that clearly the banks shouldn't lend irresponsibly, why then do they?
"Well, they have not recovered from the problems which we analysed, those of us on the Parliamentary Commission on Banking Standards, of wrong incentives, wrong forms of remuneration, and above all the too big to fail issue so that banks feel intuitively they don't really need to be all that responsible because if anything goes wrong the taxpayer will bail them out.
"The conquest of the too big to fail problem is a major unresolved problem and that's what I would like to see the George Osborne focus on."
Paul Smee, of the Council of Mortgage Lenders, said borrowers who cannot deal with the rises will be supported by lenders. He told the programme: "We have done some research and I think if interest rates go up in baby steps, a lot of people have got the ability to cope with the first couple of rises.
"Lenders are working very hard in ensuring if rates do go up and they do find that some of their customers are going into difficulty, they've got the arrangements in place to support them."