Fears of a global credit crunch grew yesterday after Standard & Poor’s predicted that house prices in the United States would plunge 8 per cent this year, dragging down America’s capital markets and hitting economic growth.

The ratings agency’s pessimistic forecast will make it much harder for all but the most credible companies to raise debt, making it more expensive to finance investment and threatening America’s economic growth.

The declining outlook for the US housing market forced S&P to unveil plans to cut its credit ratings yesterday on up to $12 billion (£5.92 billion) of bonds backed by sub-prime mortgages after predicting that the home loans crisis sweeping America will “continue to decline before it improves”. Separately, Moody’s announced it had cut its rating on $5.2 billion of bonds backed by sub-prime mortgages.

S&P announced the ratings review on 612 issues of mortgage-backed securities as Home Depot, the world’s largest do-it-yourself retailer, issued a profits warning and blamed the slumping American housing market. DR Horton, the largest American home-builder, also issued a profits warning after orders plunged 40 per cent in its third quarter.

S&P also said it planned to change the methods it uses to rate existing and new mortgage bonds and derivatives – or collateralised debt obligations – to reflect the increased likelihood of mortgage defaults and losses.

The declining outlook for the US mortgage market sent the dollar to a record low against the euro of $1.3740 and a 26-year low against the pound, which rose as high as $2.0274. Shares on Wall Street tumbled and the Dow Jones industrial average closed almost 150 points lower.

Ben Bernanke, the Chairman of the Federal Reserve, did nothing to calm investor nervousness about interest rates by declining to comment on his view of the American economy in a speech yesterday.

European stocks recorded their biggest drops in a month because of fears that America’s credit crunch and the resulting economic slowdown could cross the Atlantic.

David Weiss, S&P’s global chief economist, said that the price declines would easily outstrip the record set in the last housing market crash in 1991, when property values fell by 6.5 per cent.

Mr Weiss predicted the housing market would bottom out early next year but that losses relating to home-loan investments, such as mortgage-backed bonds, would not peak until the end of 2008 or the start of 2009.

The crisis stems from a dramatic rise in house prices in recent years, to represent 3.4 times average household income in 2006, which has left borrowers struggling to meet their repayments after a series of rate rises.

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