Speaking on BBC1's Andrew Marr Show, he said if interest rates were not increased by the Bank of England, there was a danger that large parts of London could be inhabited only by foreigners and bankers as house prices spiralled.
He added that, on the other hand, if interest rates were increased it would have a negative impact on UK manufacturing since exchange rates would rise, making exports harder.
It is the first time Cable has spoken so openly about the possibility of interest rates rising due to the imbalance in the economic recovery.
He again called for the government to rethink its Help to Buy scheme, which he said was conceived in entirely different circumstances. He also hinted strongly he did not want to follow the Conservative path on spending cuts after the election in 2015, saying the social fabric was under strain.
Cable said: "There is a raging housing boom in London and the south-east, and not in other parts of the country. The danger of raising interest rates is that you hit those parts of the country which are not yet fully recovered, you push up the exchange rate and that hits manufacturing. We don't want that. On the other hand, if you do not increase interest rates – if that is the way the governor and the Bank of England go – then this boom that is taking place in housing prices gets out of control and the only people that can afford to live in large parts of London are foreigners and bankers, and we don't want that either."
He said the government needed to look again at the Help to Buy scheme, which involves government backing for mortgages so that buyers do not have to provide such a large deposit, saying "it was conceived in very different circumstances".
Cable also said he noted the rating agency Standard & Poor's had reaffirmed the UK's AAA rating, but had expressed concerns about imbalance in the UK economy.
He said: "We have got to have a sensible balance on public spending cuts – which is getting very severe. Some very good services are now being seriously affected."
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