Harsh new conditions set by banks and building societies may leave many borrowers unable to get a mortgage after the sudden demise of Bear Stearns fuelled concerns that the credit crunch will prove deeper and more enduring than was first thought.

Lenders, desperate to reduce their exposure to risky debt, are turning away borrowers with small deposits or a credit-record glitch as small as a single missed payment. The number of home-loan deals available has plunged and the number of unexpectedly denied loans has soared.

Hundreds of thousands of existing homeowners can expect to be hit with higher interest rates in the coming months. Experts are now warning that the fallout from the US will even affect “safe” prime mortgage borrowers as banks become increasingly jittery and attempt to shield themselves from any housing market downturn.

A quick revival in property prices has been ruled out. The Bear Stearns affair and the prospect of hundreds of job losses have cast a pall over the prime property market — and especially the homes priced up to £3 million that are favoured by bankers. The impact is expected to be worst in London, but the pain is likely to send ripples across the country.

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Charlie Ellingworth, a director of Property Vision, says: “This will get worse before it gets better. Northern Rock only really affected Northern mortgage holders. Bear Stearns is a global bank and US banks are always the first to downsize ruthlessly when things go bad, so Americans here will put their houses on the market and go home.”

Jennet Siebrits, head of residential research at CBRE, the international property corporation, said: “This suggests that the credit crunch is deeper than first thought.”

The value of prime property in Central and West London was rising by as much as 50 per cent 12 months ago, as record bonuses were poured into property and international buyers lined up. The furious activity masked the decline of the market in many other parts of the country.

But changes to non-domiciles’ taxation rules have unnerved foreign buyers, just as City workers start to worry about job security. David Salvi, founder of the Central London estate agent Hurford Salvi Carr, said: “The jobs market in the City is the new driving force in the property market. We are six months into a downturn and we are into a spiral that’s not easy to get out of.”

The Centre for Economics and Business Research predicts that the London market will now trail the rest of the country, with falls of 2 per cent across the country to be overshadowed by declines of up to 3.5 per cent in the capital.

Areas in the South West, along the Cornwall and Devon coasts and in the Cotswolds, which are popular with second-home owners, are expected to feel the chill. Yet the agent Hamptons International says that almost 40 per cent of home-seekers in its regional branches are from London, up from 13.4 per cent two years ago.

A difficult start to the year had been predicted since September, when it became clear with the collapse of Northern Rock that Britain would not remain immune to the US sub-prime problems. Agents such as Savills had hoped that the pain would largely be restricted to the first quarter as the market adjusted before the spring selling season, but Liam Bailey, head of research at Knight Frank, said he now believed that it would take until 2010 before there was any recovery in the market. He said: “The whole market suffers with these changes. The last downturn was in 2001 and it took about two years to recover. This is the beginning of another.”

The latest data from Nationwide, the biggest building society, shows that house prices have already fallen for four consecutive months, with a decline of 0.5 per cent in February.

Marc Goldberg, head of residential property sales at Hamptons International, said that prices in parts of Central London were 10 per cent lower than a year ago.

The credit shortage has been a defining feature in the market. Nick Salmon, commercial director of the Harrison Murray chain of estate agents, said: “It’s poor old first-time buyers that have been having the problems.”

Agents report that even those borrowers who have secured pre-approval for a mortgage are finding offers suddenly withdrawn. This is contributing to increases in failed transactions.

British banks are exposed to the US crisis because they rely on wholesale markets to fund lending. Since the collapse of the US financial markets, this funding has virtually dried up.

The cost to banks of borrowing the money that they lend to homebuyers has been rising for the past month. Swap rates — the money-market rates that determine fixed-rate mortgage lending — have gone up from 4.89 per cent at the end of January to 5.93 per cent now. Banks, afraid of falling house prices, are reserving any funding they do have for customers who are least likely to default on the loans. On a £150,000 Nationwide home loan, a borrower would now be forced to save £37,500 to get its most competitive rate of 5.68 per cent. A month ago the same borrower would have required a deposit of only £15,000, or 10 per cent, to obtain the same rate.

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