Homebuyers in the UK may soon be feeling the effect of a bad debt crisis in the US. On the other side of the Atlantic, property prices are falling because banks have lent money to people with a poor credit history who are increasingly defaulting on their loans. This is causing huge instability in the US market which has seen house prices fall and the dollar weaken against other currencies.

The dollar fell to a record low against the euro this week and the pound has been trading above two dollars for more than a week. Analyst Datamonitor says that the UK sub-prime market, as it is known because it lends to those who have poor credit ratings and have often defaulted on repayments, increased in size by 28% during 2006, to a total of £24.6bn.

This side of the market is likely to continue expanding at nearly twice the rate of the traditional mortgage market but is also at risk from people defaulting on their loans. It is expected to be worth some £31.5bn by 2011, after growing at an annual rate of nearly 5%.

Report author Maya Imberg said: “More consumers are unable to cope with meeting their financial commitments. High levels of consumer debt coupled with more difficult economic conditions will drive the sub-prime mortgage market forward over the next five years.”