BBA statistics director, David Dooks, said: “Mortgage activity is notably lower than this time last year and, as we expected, lending has begun to slow down.”

“Judging by the significantly lower number of mortgage approvals in October and November – partly resulting from lower demand, partly from tighter supply – the market is likely to continue slowing in the coming months,” he added.

The BBA found that approval figures for November were little higher than the record low reported in October, while approvals for remortgages rose slightly, accounting for a record share of total approvals.

Meanwhile, a study from Nationwide reveals that house prices fell 0.5 per cent in December, representing the second consecutive monthly decline. It revealed that the average UK property price still rose £8,334, or 4.8 per cent, year-on-year between November 2006 and November 2007 to £182,080.

“The housing market has weakened significantly in the closing months of 2007 after holding up more strongly than expected in the earlier part of the year. While we finish the year with house prices broadly in the range we had expected, the path to this point has been quite different to our expectations,” commented Nationwide’s chief economist, Fionnuala Earley.

She added: “As funding conditions have tightened and risk aversion has risen amongst banks, there has been a decline in the availability of mortgages at the riskier end of the borrowing spectrum and an increase in their price. This will undoubtedly choke off new sub-prime lending in 2008, but may also make it more difficult and expensive for existing sub-prime borrowers to re-mortgage.”

The building society expects the MPC to cut rates by a further 50 basis points and possibly even more. Despite this, Ms Earley conjectures that: “lower interest rates are more likely to stabilise market activity rather than re-ignite it.”

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