A sudden drop in mortgage approvals recorded by building societies has sparked fears that the long-awaited correction in the housing market is about to begin.

The value of new approvals by members of the Building Societies Association (BSA) fell to £3.9 billion in April, its weakest level for nearly two years. The fall from March’s figure of £4.6 billion was the sharpest drop since September 2004.

Mortgage approvals are widely seen as a pointer to the next step in house prices, and the data yesterday was the clearest sign yet that the Bank of England’s four interest-rate rises since August are taking their toll on homeowners.

However, hopes that a housing market correction could mean that rates will not rise beyond 5.5 per cent were dashed yesterday with the publication of worrying new figures on the money supply.

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M4, or broad money, grew by 13.3 per cent in the year to April, up from 12.8 per cent the previous month. The Bank tracks the money supply as one indicator among several of the underlying scope for inflation in the economy.

Jonathan Loynes, of Capital Economics, said: “April’s figures would seem to add to the growing likelihood that interest rates will rise as far as 6 per cent.”

Other mortgage data out yesterday presented a mixed picture of the property market. Data from the Council of Mortgage Lenders (CML), seasonally adjusted, showed that lending stayed in a relatively narrow range in the first four months of the year. However, the CML said that a “modest slowing in activity” was now due following higher rates.

The British Bankers’ Association said that underlying net mortgage lending rose by £5 billion last month, slightly slower than in March and below its recent average of £5.4 billion.

Unsecured personal borrowing was unchanged overall in April, compared with a fall of £100 million in March.

David Dooks, the BBA’s statistics director, said: “High house prices and increasing monthly repayment costs are causing a slowdown in the mortgage market and people are using money from their accounts instead of borrowing to meet their spending needs.”

Marchel Alexandrovich, of Dresdner Kleinwort, said: “Overall, the expectation is that we will see weakness in the housing market numbers in the next three to six months, and we should see weaker price inflation. The question is how low we go.”

Mervyn King, the Governor of the Bank of England, said last week that it was much too early to say that the housing market had begun to slow.

However, the Bank’s Inflation Report found that high levels of debt meant that interest-rate rises could have a larger impact on mortgage holders than in the past.

It also noted that households refinancing fixed-rate mortgages were beginning to feel the pinch, as the average quoted rate on two-year fixes has now climbed above its level of two years ago.

Mr Alexandrovich said: “If the Bank overtightens, there is a risk of quite a severe effect on the market and the economy.”

Adrian Coles, the BSA director-general, said that weaknesses in disposable income growth and high inflation had cramped people’s saving rate. “Against such a background, it is imperative that people ensure that their finances can withstand any futher increase in interest rates,” he said.

This week Rightmove said that asking prices for homes were up 13.1 per cent in the year to mid-May, down from 15.1 per cent the month before.

Peter Newland, of Lehman Brothers, said: “All in all, leading indicators of housing activity – including approvals and the Royal Institution of Chartered Surveyors sales-to-stock ratio – have started to hint at a peak in housing activity, although it may take some time before this feeds into house-price measures, and it is unlikely to be much cause for concern for [monetary] policymakers.”