We are now all familiar with the damage that can be done to financial markets by a subprime lending crisis. Global equity markets have taken a battering recently because of concerns about American home mortgages.

So which country is next?

Britain has had a property bubble every bit as crazy as America’s. Valuations were stretched, and lending criteria loosened. And now arrears are starting to rocket, even while the economy remains healthy. Not only does Britain face its own subprime crisis, it could be far worse than in America. The latest figures on debts and mortgage arrears in Britain certainly make grim reading.

Households “are getting into more trouble when it comes to their mortgages,” London-based consulting firm Capital Economics Ltd. said in a note to investors. “With higher interest rates yet to have their full effect, mortgage arrears are likely to rise further, while unsecured bad debt might start to rise again too.”

The signs of trouble ahead can be seen in the number of homes now being repossessed because their owners can’t keep up the payments.

According to the Council of Mortgage Lenders, lenders foreclosed on 14,000 properties in the first six months of the year, 30% more than in the year-earlier period. That reflected “the impact of an increasing amount of subprime lending within the overall market,” the council said in a statement on the figures.

Arrears aren’t in great shape either.

An estimated 125,100 households are behind with their mortgage payments, about 1% of the total, according to the council. Homeowners behind with the payments will have their homes repossessed a few months down the line, unless their finances improve.

The wider picture of indebtedness isn’t much more comforting. The British are deeper in the red than any other major economy. According to data from the National Institute of Economic and Social Research in London, the ratio of household debt to personal income is 1.62 in Britain, compared with 1.42 in America, 1.36 in Japan, and 1.09 in Germany.

Britain is now facing a subprime crisis on a similar scale to America. As anyone who has taken out a mortgage in Britain will know, banks shovel out money without asking many questions. A review by Britain’s Financial Services Authority last month criticized reckless lending in the subprime sector, which has, it said, “resulted in the approval of potentially unaffordable mortgages.”

The British market doesn’t fall neatly into “prime” and “subprime” categories. Most of the mainstream lenders offer so-called self-certified mortgages, which require no proof of income. Plenty of prime borrowers — meaning people who haven’t defaulted on a loan yet — are likely to take out mortgages that will be hard to make the payments on.

The Britain subprime crisis may be a lot nastier than the American one. Here’s why.

First, despite the mounting evidence that people can’t afford them, house prices continue to soar.

The National Housing Federation predicted this week that British house prices will rise 40% in the next five years, taking the average value of a home to 302,400 pounds — $618,000 — by 2012.

The average British home already costs 11 times the average local salary, and that figure continues to increase. It is driven mainly by Britain’s small geographic size, high levels of immigration, and very low levels of house building. People have to live somewhere — a home, after all, isn’t an optional item for most of us.

The net result is that even as payment problems mount, people will carry on taking out bigger mortgages. What choice do they have?

Next, American interest rates may have reached their peak and could soon fall.

In Britain that isn’t the case. The Bank of England is likely to raise borrowing costs at least once more to 6%. If the housing market and general inflation don’t show any sign of responding to that treatment, interest rates could go higher still. That won’t help borrowers already hard-pressed to make their payments.

There should be two self-correcting mechanisms for fixing a subprime crisis in the housing market. House prices should gently fall, making properties more affordable, and reducing the size of loans. And interest rates should stabilize or fall, making the payments on those loans easier to maintain.

Neither seems to apply in Britain.

Instead, interest rates are rising and so are house prices. The result is that thousands of families are left in a vulnerable position — and so are the banks that have lent them money — not to mention the investors who have bought those loans as they have been sold on.

While the property market rises, everyone will be safe. If your house is worth more than your mortgage, you will be desperate to hold on to it. If you get into trouble, you can always sell it, repay the loan, and move somewhere cheaper.

Yet, as America has discovered, if house prices start to fall, that arithmetic changes. If you are in trouble with your mortgage, you can’t pay it off by selling. There is little incentive to keep up the payments. Why not just walk away, and hand the keys and the problems over to the mortgage company? Britain hasn’t reached that point yet. But if it does, the mess could be even worse than in America.

Mr. Lynn is a columnist for Bloomberg News.