There is little chance of mortgage lending reviving this year
The number of mortgages lent to house buyers fell last year to its lowest level since 1974, the Council of Mortgage Lenders (CML) has said.
There were just 516,000 mortgages granted to house buyers, down 49% from the level seen in 2007.
The squeeze on mortgage funds has seen widespread rationing by lenders, which meant that first-time buyers had to put down an average deposit of 22%.
The CML believes that lending is likely to fall even further this year.
"The shortage of mortgage funding and reduction in the number of active lenders has reshaped the mortgage landscape in the space of a year," said Michael Coogan, the CML's director general.
"This low level of transactions is insufficient for the functioning of an efficient market," he added.
The slump in lending and sales has been directly responsible for the sudden collapse of house prices seen since the credit crunch started in the summer of 2007.
Last year the number of loans to first-time buyers fell by 46% to just 194,200, which was the lowest figure since the CML's records started in 1974.
And mortgages granted to people moving house dropped by more than half to 322,200.
The government has launched a number of initiatives to stimulate bank lending, which it is widely hoped will feed through into greater lending to home buyers.
But the CML expects that in 2009 new lending will fall to a level where it will be outstripped by people repaying their mortgages.
"Measures are now in place to seek to restore the flow of funding to the mortgage market, but this will take time to feed through," said Mr Coogan.
"Further action may still be necessary to increase transactions, stabilise prices and restore confidence," he added.
Despite the Bank of England cutting the Bank Rate in recent months to just 1%, the dramatically lower cost of repaying a mortgage has not led to a revival in buying and selling houses.
Lenders have increased the level of deposits they demand from borrowers, choking off the supply of potential buyers.
About two-thirds of all new mortgage deals currently require at least a 25% down payment from the borrower.
And the average 22% deposit currently being put down by first-time buyers is the highest since the CML's records started back in 1974.
Until the end of 2007 a 10% deposit was the norm.
Andrew Montlake, at mortgage brokers Cobalt Capital, said business was now dire.
"The CML data crystallises what we already knew, namely that from a mortgage perspective, 2008 was a massacre - the entire market is barely recognisable from what it was two years ago."
Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA), said there was now a lot of pent up demand.
"NAEA figures show that there is a huge demand for property from first-time buyers, who are increasingly visiting estate agents, registering their interest and searching for property," he said.
"These figures demonstrate that they are being frustrated at the final hurdle because lenders are not making mortgages available."