Fears of a housing market crash in the UK heightened today as annual mortgage lending in May plunged by 56 per cent to a record low.

Figures from the British Bankers' Association (BBA), reveal that monthly mortgage approvals fell 20 per cent from 34,752 in April to 27,986 in May, below a six-month average of 40,570.

Compared to last May, mortgage approvals fell by 56 per cent over the year.

The number of re-mortgage loans approved also slipped, falling from 68,971 in April to 63,303.

The total net value of loans approved rose by £4 billion, down from £5.2 billion in April.

Howard Archer, chief UK and European economist at Global Insight, said today's figures will increase concern that "we are in for an extended, deep correction in the housing market."

The housing market is stalling because of a lack of mortgages available to new buyers.

Lenders, keen to protect their margins during the credit crunch, are demanding larger deposits from first-time buyers.

Only those with a deposit of more than 5 per cent of the value of their home can secure a deal, while the most competitive loans are reserved for borrowers with a 25 per cent deposit or more.

The lack of buyers in the market is forcing down prices as sellers try to make their homes more attractive to prospective purchasers.

Sellers were forced to wipe nearly £3,000 off asking prices in June to try and clinch a sale, figures released earlier this week by Rightmove, the property website, showed.

The BBA is predicting that mortgage approvals are expected to continue over the coming months, dragging house prices down further.

In addition, mortgage rates are continuing to rise. Last week, Halifax raised its rates by 0.5 per cent for the second time in a fortnight.

House prices have fallen by 7.7 per cent since the market turned in September, according to Halifax house price figures, but Mr Archer said that prices could decline by 24 per cent by the end of next year, forcing millions of people into negative equity.

About two million people will be plunged into negative equity if house prices fall by 25 per cent by 2010, according to Morgan Stanley, the investment bank.

There are also worries that the Bank of England may raise interest rates in the coming months to curb rising inflation, making life even more difficult for mortgage borrrowers.

David Dooks, the BBA's statistics director, said: "Measures of mortgage activity were lower in May as a result of tighter lending criteria and economic pressures on households."

However there are signs that consumers were continuing to spend, despite the downturn in the housing market. Credit card spending rose by £500 million during May, after falling by £300 million in April.

The rise chimes with official retail sales figures released last week which showed that spending on the high street reached record highs last month.

"People spent more on credit cards, but repayment levels were lower than expected in May and after April's busy month with people putting money into ISAs, personal deposits were not as strong," Mr Dooks said.

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