Lenders have been warned to prepare for further weakness in the mortgage market after data showed a 38 per cent fall in the number of loans approved for house purchases.

The number of mortgages agreed with homebuyers slumped to 40,201 last month from 64,563 a year earlier, the British Bankers’ Association said. By value, the decline was 31 per cent.

Other areas of the market were also weak, with the number of equity withdrawal deals slumping by 34 per cent.

"The [overall] weakness in December was particularly noticeable this year," the BBA said.

David Dooks, the BBA director of statistics, said: "This time of year sees a seasonal weakness in loan demand. But with approval volumes remaining well below those in the same month a year earlier, mortgage lending is expected to remain relatively subdued in the near-term."

The warning comes the day after Nationwide, the building society, revived market hopes by reporting a 0.4 per cent rise in house prices this month and attributing a slump in lending in November to a regulatory shake-up.

Today’s data signalled that a house market slump could not be ruled out, Howard Archer, the Global Insight economist, said.

"The further sharp fall in the number of loan approvals for home purchases clearly points to further weak activity in the housing market in the early months of 2005," he said.

"Latest data suggest overall that house prices are softening relatively slowly, indicating that the pressure on the sector…is manifesting itself more in fewer tranactions than in sharply falling prices. However, it is questionable whether this can remain the case."

Barclays Capital took a less pessimistic view. "The level of approvals over recent months suggests that house price inflation should continue to fall back gradually, not abruptly," the broker said.

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