LONDON (ShareCast) - A big drop in the number of mortgages approved in June does not bode well for house prices in the coming months, experts said Tuesday.

Just 36,000 home loans were approved by lenders last month, according to Bank of England figures, down from 41,000 the month before and the worst figure since records began in 1993.

That compares with the whopping 114,000 reported a year ago when the housing market was still riding high.

Meanwhile, a smaller than expected increase in net mortgage lending of £3.1bn took annual growth down to 7.5% from 8.2% in May.

In other BoE data out Tuesday, net lending to individuals rose by £4bn in June versus £5.1bn in May and forecasts for a £5bn increase.

“The latest numbers from the Bank of England demonstrate in the clearest possible way the consequences of the credit crunch for the residential property market,” said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.

"Unless the authorities take steps to restart the mortgage market, the likelihood is that there will be more bad news in store for the housing market and the retail sector during the latter part of the year."

On top of that, ex-HBOS chairman Sir James Crosby warned today that problems in the mortgage market are likely to remain for years.

In a report carried out for the Treasury he said there would be a shortage of mortgage finance “throughout 2008, 2009 and 2010”.

Sir James is against the setting up of finance companies along the line of Fannie Mae and Freddie Mac in the US, but thinks banks could be allowed to swap new mortgages for government debt in a bid to stimulate the mortgage market.

In April, the central bank introduced a £50bn Special Liquidity Scheme aimed at freeing up the flow of cash within the financial sector. But banks claim this has failed to bring down Libor, the rate at which banks lend to each other, or mortgage costs.

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