Property market faces paralysis as mortgage slump goes off the scale

Only 42,000 home loans got the green light in May, down 28 per cent since April and 64 per cent lower than a year ago, according to the Bank of England.

City economists described the recordbreaking figures as "off the scale" with one forecasting they will herald a 20 per cent collapse in property prices this year.

The news comes as figures show the average price for a London house is £11,500 less than it was a year ago - with values falling the equivalent of £130 per day.

As mortgage rates continue to rise due to the credit crunch and buyers fear committing to the market, there is no end in sight to the market's "deep freeze".

Separate figures from building societies suggest that their lending has dried to the tiniest trickle.

Net mortgage lending by building societies plummeted 90 per cent to £125 million in May, the equivalent of a mere 625 typical home loans of £200,000.

Adrian Coles, director general of the Building Societies Association, said: "The lending figures ref lect the depressed state of the housing market.

With 74 per cent of respondents to the BSA's Property Price Tracker survey expecting property prices to fall over the next year, it is no surprise that demand for new mortgages remains very low.

"It is important not to read too much into one month's very low figures. However ... we expect activity to remain at low levels for some time."

The Bank's figures were much worse than most commentators were expecting, leading to a new round of even more pessimistic forecasts for the property market.

Vicky Redwood, UK economist at Capital Economics, said: "The latest news was absolutely dire ... at face value the slump in approvals is pointing to house price falls of 15 per cent to 20 per cent by the end of this year."

Nicholas Leeming, director of the website propertyfinder.com, said: "Housing transactions have seized up not because people don't want to move, but because the lenders won't play fair with mortgages."

New figures by house price monitor Hometrack show there has been an average £4,000 fall in property prices in the capital in the last month alone.

The figure, based on sales rather than asking prices, show the biggest loser in the past month was Merton, where average prices fell by £9,500, the equivalent of more than £300 a day. In Hammersmith and Fulham prices are now £8,600 lower than a month ago, and in Wandsworth they are down by £8,500. There were no price rises in any borough last month. The only areas where prices remained stable were the City and Tower Hamlets.

Year on year, prices across London have fallen by an average 3.6 per cent.