Mortgage approvals slumped to a seven-month low in September as net lending tumbled to only £112m, according to Bank of England figures.
The net lending figure, which strips out redemptions and repayments, compares to £1.6bn in August.
The sharp fall is likely to have been caused by a combination of a lack of activity in the property market and existing homeowners focusing on reducing mortgage debt. But the data nonetheless added to the growing weight of evidence pointing to a crisis in the housing market, with prices falling again.
Just 47,474 home loans were approved in September compared with 47,498 in August and the recent peak of 59,144 in November 2009. It is the fifth consecutive monthly fall.
Even that is still substantially below the 70,000-80,000 level economists say is needed to maintain consistent house prices. Mortgage approvals have actually averaged 90,700 a month since 1993. They are now only just above half that figure.
The Bank of England figures follow on from Nationwide's October figures which showed that house prices fell by 0.7 per cent month on month in October. It was the third drop in four months, with September the only exception: then prices were flat.
The problems in the housing market are worrying economists because of the way they act to underpin confidence. Consumer spending is heavily influenced by this and is already poised to come under pressure in the new year as a result of the planned increase in VAT to 20 per cent.
Howard Archer, chief economist at IHS Global Insight, however, said that the figures could have been worse. He is of the view that while prices will fall, they will not crash. "The data maintain our belief that house prices will not crash but will trend down by some 10 per cent over the final months of 2010 and in 2011, in the face of a nasty combination of factors. In fact, there has been a plethora of data and survey evidence recently that is supportive to this view," Mr Archer said.
Mr Archer argued that high unemployment – which is likely to rise – muted wage growth, an increasing fiscal squeeze, low and deteriorating consumer confidence, difficultiesin getting a mortgage (particularlyfor first-time buyers), a market firmly in favour of buyers, and a houseprice-earnings ratio above long-term norms were together "a poor combination of factors for house prices".
Vicky Redwood, senior UK economist at Capital Economics, said: "September's UK household borrowing figures provide more evidence – as if any were needed – of the problems in the housing market. The number of mortgage approvals edged down very marginally from their already exceptionally low level of 47,500. These low levels of activity now seem to be contributing to renewed falls in house prices."
Earlier this week the British Bankers' Association said net mortgage lending by the major banks had fallen to its lowest level for a decade.
Consumer lending data showed that net lending to individuals in September actually rose by £373m compared with an upwardly revised increase of £1.596bn in August. But even that was considerably lower than the £1bn rise forecast by economists.