Approvals of new home loans dropped last month to the lowest levels for two years, in the latest sign that the housing market is cooling rapidly.

Bank of England figures showed that the number of new mortgage approvals in September fell to 102,000, down from 108,000 in August, and almost a fifth lower than at the same time last year.

The weak data added to growing evidence, now coming thick and fast, that the property market faces a sharp slowdown as the five interest rate increases by the Bank, and now tighter lending conditions triggered by the global credit squeeze, take their toll.

Earlier this month, the British Bankers' Association reported that mortgage approvals by leading banks fell by 14 per cent in September, to a level that was down 27 per cent from a year before.

Today, Hometrack, the property website, reported that, according to its research, house prices in England and Wales fell 0.1 per cent in October, on the heels of two months of zero growth.

There were some signs of lingering strength in the market today, however, as the Bank’s figures also showed that net mortgage lending rose by a robust £9.8 billion last month, the biggest increase since February. The City had expected a rise of only £8.3 billion.

However, it is mortgage approvals that are regarded as a better gauge of future market trends, as the lending figures reflect past approvals made some months ago.

The strength of mortgage lending as well as a resurgence in borrowing on credit cards and through unsecured personal loans also shown in today’s numbers will nevertheless deal a blow to homeowners’ hopes that the Bank will ride to the market’s rescue with an early cut in interest rates, perhaps before Christmas.

Overall, unsecured borrowing by consumers rose last month by a net £1.35 billion, markedly stronger than the £1.1 billion August figure, and the biggest increase since January last year.

Credit card borrowing rose by £310 million, against the modest £130 million increase in August, also the biggest gain since early last year.

Economists said that the strength of personal borrowing suggested that fears of a sharp economic slowdown next year were not deterring Britons from resorting to loans to bridge the gap between weak earnings growth and their spending.

As the Bank’s Monetary Policy Committee prepares to set base rates next week, analysts said the strength of unsecured lending is likely to deter it from cutting rates before next year.

“Significantly higher mortgage lending and consumer borrowing in September is not conducive to an interest rate cut,” Howard Archer, of Global Insight, said. “We continue to believe that the Bank of England will hold off trimming interest rates until the first quarter of 2008.”

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