The slowdown in the UK property market is being exacerbated by the imposition of more strict lending criteria and cautious potential lenders and buyers, according to an investment banking giant.

The warning comes after more homebuyers are increasingly faced with difficulty in accessing mortgages. According to Merrill Lynch, the looming unemployment crisis a contributing factor to the downturn in housing market activity. Mark Hake and Judy Shaw, who authored the report for Merrill, said this leaves the UK potentially facing a crash in the market on a par with that of the early 1990s.

The report stated: “We are clearly seeing a UK housing market being squeezed on opposing fronts - by a lack both of willing lenders, as well as willing purchasers.

“This was precisely the pattern in the early 1990s, in that once house prices started to fall, consumers felt no need to buy, taking more demand out of the market, which in turn compounded the shortfall of prospective purchasers so leading to further price falls.”

It added: “If, as we suspect, unemployment trends higher, then we believe that this will put additional pressure on housing transaction volumes.” The forecast from Merrill comes as data from the Office of National Statistics revealed that in the three months to May the number of people out of work rose by 38,000.