The stockbroker says: "The outlook for the market is finely balanced between a continued correction and a crash." It singles out housebuilders Berkeley Group and Wimpey Homes as being the most exposed in the event of a crash (see "Risky business", below).
The report is the latest of a series of indications that the London housing market is beginning to wobble – the RICS said recently that prices were actually falling.
The report argues that London is suffering because first-time buyers are being priced out of the market, and buy-to-let investors are starting to sell a proportion of the estimated 65,000 properties that they bought in the capital over the past four years.
It says: "Prices would have to fall 27% just to return to historic averages, and there is a risk of negative equity returning. Any downturn should be less severe than the last one, but could have a disruptive effect beyond London."
The report speculates about the consequences for the rest of the country if the London market did slump – particularly in the South-east and South-west.
It says: "A fall in London prices could trigger a temporary slowdown in volumes across the country, even if prices hold up locally. There is a risk, therefore, that earnings forecasts for the current year or next may have to be pulled back for some companies."
The report warns that volume housebuilders which build largely on greenfield land are more at risk than urban regeneration specialists.
It says: "Companies that specialise in mixed-use sites with a high social housing element are more likely to use their planning skills to maximise the value of strategic land."
Risky business: Firms identified in the reportHigh risk
Berkeley Homes 45% of sales in London and 39% in the South-east. It is particularly associated with the buy-to-let market – but has track record of turning downturns to its advantage. Wimpey Acquisition of Laing increased exposure to London and South-east; concerns over bedding down third big buy in uncertain market. Low risk
Crest Nicholson Made a strategic decision to pull out of central London flats; expanded in the North-west; has good land buying and regeneration expertise. Westbury Homes Best risk profile of survey; London accounts for 7% of sales; the subject of persistent bid speculation.
Is the London market really doomed? Email us your analysis on firstname.lastname@example.org