More housing gloom as mortgage lending hits lowest level for seven years

The number of mortgage approvals for house purchases fell by 27 per cent in September.

Last September 72,155 mortgages were approved. This year that dropped to 52,685, the British Bankers' Association said. It was the smallest number of approvals for the month since 2000.

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Approvals are the key measure of property market activity. A decline is seen as an early indicator of a slowdown in house prices.

The value of approved mortgages also fell, from £6.1billion in August to £5.8billion in September.

A fourth consecutive monthly fall in lending for house purchase is fresh evidence that the market is slowing in response to higher borrowing costs.

David Dooks, the Association's director of statistics, said: "Lower amounts of new mortgage lending and fewer loans approved for house purchase signal a weaker outlook for the mortgage market, particularly if loan supply reduces in the aftermath of the recent financial markets difficulties and borrowing costs remain at current levels."

Wholesale money markets have been in crisis since August, following rising default rates among high-risk mortgage borrowers in the U.S.

The credit squeeze has hit lender funding lines, with Northern Rock the most highprofile victim so far. It saw the first run on a bank in nearly 150 years last month.

There have been warnings that Britain could face a market correction similar to that in the U.S, where house prices have slowed since mid-2005.

UK lenders have started to tighten their criteria for borrowers, which combined with interest-rate hikes, is putting the brakes on the property market, according to Global Insight economist Howard Archer.

"Slowing housing demand is expected to increasingly feed through to dampen house prices over the coming months.

"There is undeniably a very real risk that the housing market could see a sharp correction."

Lack of housing supply would help limit falls, and an expected cut in interest rates next year could provide a boost, he added.

The BBA figures show the average mortgage loan at £152,300 in September, down 1 per cent on August.

Average mortgage value has been dropping since June.

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