Hopes for a mortgage market recovery were dealt a blow today, after a leading data analyst said that lending is set to shrink by a fifth.

Datamonitor claimed that UK lending will fall by 20 per cent by the end of this year and that the full impact of the credit crunch had not yet filtered through to borrowers.

The bleak forecast came despite the recent round of rate cuts from some of the UK's biggest lenders. Halifax, Abbey and Cheltenham & Gloucester have all cut rates over the last few days as the cost of funding has fallen.

However, with fewer lenders and loans, higher prices and stricter rules, the group predicts that mortgage lending will continue to fall, by a total of 19.3 per cent in 2008 and by a further 3 per cent in 2009.

The pessimistic prediction echoes economist outlooks for the housing market. Standard & Poor's, the credit rating agency, has forecast that house prices will fall by a further 17 per cent next year. Meanwhile Global Insight, the economic consultancy, said prices would plummet by a further 20 per cent until 2010, or £40,000 on an average property, before the market begins to recover.

Datamonitor's forecast demonstrates a marked deterioration compared with the 19.7 per cent growth in lending recorded in 2006, when the market was booming. Lending began to decline in 2007 following the onset of the liquidity squeeze last September, growing by just 5.7 per cent.

However, Datamonitor said it does not expect the squeeze to have the same disastrous effect on borrowing on credit cards, personal loans and overdrafts. Lending in these areas will take a smaller hit this year, falling by 3.2 per cent before staging a recovery in 2009, when it is predicted to grow by 1.4 per cent.

Karina Purang, an analyst for Datamonitor, said: "The consumer lending market has moved beyond recognition. Lending markets are currently beset by high market uncertainties with the ongoing credit crunch, falling house prices, rising arrears and repossessions and indebted consumers struggling to find credit."

Melanie Bien, director of Savills Private Finance, the broker, said: "'The mortgage market is a fraction of the size it was last year and we expect this situation to continue into next year. Only the biggest lenders seem to have any appetite for lending and these have been reducing rates in recent weeks. However, criteria are not easing so it is still only those with significant deposits or equity in their homes who will benefit the most from these reductions in rates."