The number of loan approvals for home purchase fell by more than a third on a year ago to its lowest level in almost five years in December, the British Bankers' Association says.
Approvals are generally a good leading indicator of house prices six months out, but economists said yesteriday the December figures could point to some stabilisation in this series after seven straight months of falls.
The BBA said approvals - loans agreed but not yet made - fell 38 per cent in December on a year ago to 40,201 and were down from 47,245 in November.
Yet unlike the official Bank of England approvals figures, which last month fell to their lowest level in a decade, the BBA data are not adjusted for seasonal variations in the housing market and so should be handled with care.
Several economists said that the BoE figures, expected next week, could show their first rise since May although that would not necessarily be a signal that the British housing market is about to accelerate again.
"The level of approvals over recent months suggests that house price inflation should continue to fall back gradually, not abruptly," said Barclays Capital economist George Johns.
The Bank of England raised the cost of borrowing between November 2003 and August 2004 by a total of 125 basis points to 4.75 per cent and is expected to leave it there for several months to come.
Economists said the figures suggested that houses were becoming less affordable.
"There is an underlying slowing in mortgage lending and approvals and it is not surprising given the fact that interest rates are at, we think, a cyclical peak and house prices are very high," said George Buckley, UK economist at Deutsche Bank.
Mr Buckley predicted the central bank would have to cut rates by the end of 2005 because of weaker consumption, itself a result of lower house price inflation or house price declines. The Bank, however, has repeatedly played down the relationship between consumption and house prices.
The BBA said the latest approval figures showed that the rate hikes were helping cool a once booming market.
"It is the gradual slowdown that everybody wanted rather than a sharp correction," BBA director of statistics David Dooks.
"The consumer, the man in the street, has not got the disposable income that they had two years ago. It's not just from interest rates, it's reduced household budget generally with increased council taxes and higher utility bills," he said.
The BBA said underlying mortgage lending rose by £5.2 billion last month. Net mortgage lending growth including an additional £500 million of internal group transactions was £5.7 billion.
It said the upturn in part reflected a processing catch-up after the market watchdog, the Financial Services Authority, introduced new mortgage regulations at the end of October, including rules to standardise the way lenders provide key details on their loans.