Housing market hit by further setbacks

Britain's crumbling housing market slowed again in May, figures from the Royal Institution of Chartered Surveyors (Rics) revealed, as a separate report warned of growing mortgage arrears in the sub-prime sector.

At the same time, rising inflation is putting pressure on the Bank of England to raise interest rates. Producer prices rose at 8.9 per cent in May compared with 12 months ago, figures from the Office for National Statistics revealed.

Rics said that 93 per cent more chartered surveyors reported a fall than a rise in house prices in May, with the housing market continuing to show a collapse in transactions. The average number of transactions completed by surveyors over the past three months was just 17.4, the lowest figure since 1978.

"While demand remains weak and housing transactions continue to evaporate, there is a very real danger to the wider economy," said Rics spokesman Jeremy Leaf. "The property industry will not be the only casualty in the fallout from the credit crunch, with the high street and purveyors of a range of household goods also feeling the pinch."

The warning came as the credit ratings agency Moody's said the number of borrowers with sub-prime mortgages falling behind on their repayments rose at the fastest rate for three years during the first quarter of the year, as homeowners struggled to find new deals at the end of their initial period of preferential interest rates. Moody's "index of delinquencies" on about £32bn of mortgage-backed securities revealed that arrears in the first quarter of 2008 rose to 8.8 per cent from 7.7 per cent in the final quarter of 2007 – an increase of about 14 per cent, the worst since the final quarter of 2004. Nitesh Shah, a Moody's economist, said: "In the face of the current credit crunch, UK non-conforming borrowers are likely to continue to face restrictions in available product offerings from specialist lenders."