Britain's biggest mortgage lender today issued a shock warning of two years of falling house prices as new home loans slumped to a 15-year low.

Halifax owner HBOS said prices would fall in the "mid single digits in 2008 and 2009", having previously only predicted a "low single digits" fall this year. The bleak forecast came as the Bank of England said only 64,000 home mortgages were approved last month - the lowest number since 1993 and well below last year's peak of 115,000.

It was further evidence the property market is "frozen" because of a shortage of affordable home loans and buyers' reluctance to commit to a falling market. The collapse is being mirrored on the High Street, where research today showed retailers are suffering their worst month for nearly 16 years.

There was even more economic gloom from Bank of England Governor Mervyn King, who told MPs that rising fuel and food bills may push inflation above 3% for a prolonged period this year. That underlined the dilemma facing the Bank's monetary policy committee as it grapples with slowing economic growth and runaway inflation well above the 2% target.

The Bank has cut interest rates from 5.75% to 5% since December and borrowers were hoping for another cut next month, but economists said this was not a certainty after King told the Treasury Select Committee: "We are quite determined to bring inflation back to target."

Howard Archer of Global Insight said: "The overall impression we get is that Mr King believes the UK economic slowdown is not marked enough, at this stage at least, to step up the pace of monetary policy easing given current elevated inflationary pressures."

The new Halifax forecast today means it believes house prices could fall by 20% in real terms from their peak at the end of last year, with no recovery until 2010. Even with a swift recovery, it could be 2011 or 2012 before prices get back to their levels of 2007.

The warning is significant because Halifax's forecasts are normally seen as conservative, and it puts the bank, which accounts for one in five of all mortgages in Britain, in line with some of the gloomier City predictions.

On the High Street, the CBI said 53% of retailers said sales in April were "poor" for the time of year, compared with just 15% who said they were "good". The balance of minus 38 was the weakest since November 1992.