John Donohue, a Manchester-based entrepreneur, first thought of selling his Georgian-style house in Altrincham last June. The market was rising and his neighbour had just sold his equally large home for £1.96m.

He put his six-bedroom house on the market for slightly less, £1.95m. It is still on the books of Jackson-Stops & Staff, his agents. It has attracted three viewings in nine months and has seen its price slashed to £1.85m, and last month to £1.725m.

“The market just seems to get worse,” he lamented. “When I first contacted an agent he said he could sell 10 of them on the estate, they were that easy to sell. Everything seemed to conspire against us. The credit crunch and financial wobbles seem to be affecting the higher end of the market as much as anywhere.”

Many other potential sellers may be feeling the same way this weekend. Property “porn”, the British obsession with house prices, has suddenly turned into a video nasty.

Late last month the Nationwide building society reported a fifth successive month of falling house prices, the first time that had happened since the early 1990s.

One London estate agency, Douglas & Gordon, is retraining staff in how to sell in a downturn. Another, Savills, says 50% of properties at its Fulham office have had a price cut. A five-bedroom home valued at £2.15m three weeks ago is down to £1.95m.

For some people the falls mean actual losses, not just smaller gains than they might have expected. Janie Dix, from Manchester, was lured into the buy-to-let market and bought two apartments in Leeds three years ago for £300,000. When the rent failed to cover her borrowings, she had to sell.

Last month the flats went for just £250,000. “I keep asking myself, ‘How could I have been such a moron?’,” she said.

Lenders, fearing losses themselves, are tightening terms or withdrawing altogether. Last week First Direct, part of HSBC, announced that it was closing its doors to new mortgage applicants, having been inundated with applications for its competitive deals. Others followed, either pulling mortgage deals or raising interest rates because, thanks to the global credit crunch, they no longer have easy access to funds.

Some 20%-30% of house purchases are falling through because of the problems of obtaining finance, up from a norm of 10% to 20%.

The doom and gloom appears all-enveloping. Prices are falling in many areas and even those who want to buy cannot get a mortgage. It looks like a perfect storm - but is this really the start of the long-feared housing crash?

THE folk memory of falling house prices in Britain was established in the great housing recession of the early 1990s.

Its seeds were sown when Nigel Lawson, chancellor of the exchequer under Margaret Thatcher, unveiled his Budget of 1988. It cut taxes, but also the amount of tax relief allowed on mortgages (which was later scrapped altogether).

The government made a fatal mistake by announcing a five-month delay before the tax relief cut came into effect. The result was a mad scramble to take advantage of the relief while it lasted.

That scramble, together with the tax cuts and low interest rates (for the time), gave Britain a housing boom of Klondike proportions. Prices nationally rose by 34% over the course of 1988. In parts of the southeast they jumped by 50%.

It could not last. When interest rates rose sharply, the effect was devastating. House prices fell by 20% in the following three years, according to the Nationwide, and 12%-13% on the Halifax and government measures. By 1995, they had dropped 30% to 40% in “real”, or inflation-adjusted, terms.

Over the 1990-95 period 345,000 homes were repossessed and at least 2m households fell into negative equity, where the value of their property was worth less than their mortgage. It took until the late 1990s before this scourge came to an end.

Could history repeat itself? Nick Clegg, the Liberal Democrat leader, warns that the housing market faces “an almost identical situation to that in the 1990s”. “The fact is we are on the cusp of what could be a housing crash,” he said.

The International Monetary Fund said last week that UK house prices were “overvalued” by about 30% and that Britain, along with Ireland, the Netherlands and France, was “particularly vulnerable” to a further house price correction.

It sounds desperate, but predictions of an imminent crash have been proved wrong on many occasions in recent years. It is worth remembering that five years ago the IMF also said Britain’s house prices were 30% overvalued – and they proceeded to soar.

There is an element of psychology at work: with gloom about the market all-pervasive, every weak morsel of information is seized upon.

The Land Registry, for example, reported last week that prices were flat in February and had fallen 0.4% in London. It prompted headlines of “slump” in the newspapers.

Yet London prices are still 10.6% up on a year ago and less than a quarter of boroughs reported falls in the latest month. Some, including Harrow and Hackney, saw rises of 1% or more.

The Land Registry figures also showed that while many regions experienced small declines in house prices in February, and Wales suffered a 1.1% fall, prices rose in Yorkshire and the Humber, and the East and West Midlands.

Property analysts also say that any national fall has to be put into perspective. Even a 20% drop would only take prices back to their 2004 level.

Though Martin Ellis, chief economist of HBOS, which owns the Halifax, does not deny times are tough, he is adamant the conditions do not exist for a crash.

“Confidence has a role to play but what matters in the housing market are job prospects and job security,” he said. “The demand for mortgages is still strong. Some of the numbers you see around are exaggerated, particularly in relation to the payments shock.”

That shock, caused by some lenders raising rates and borrowers coming off fixed-rate loans to face higher repayments, may not be as bad as feared. At present the average rate increase homebuyers face is only one percentage point. It will be unpleasant for many, but not unbearable.

Economists at Barclays, who have replicated the IMF’s analysis but with their own assumptions and calculations, agree that house prices will slip this year but only modestly, by 2%. Treasury officials also dismiss comparisons with the 1990s.

“People are facing higher mortgage rates but it is not remotely on the scale of the early 1990s,” said a senior Treasury official. “And the really big difference is in the labour market.”

Official figures show that employment is at a record 29.5m and unemployment at its lowest since the mid1970s. HOWEVER, there is one big uncertainty in all these analyses: the credit crunch. How long it will last and how tough it will be is hard to predict.

At least half of mortgage products have disappeared from the market since last summer, with more being removed by the day because of the crunch. The Bank of England reported last week that more than 40% of lenders plan to reduce the amount of lending they do.

The Council of Mortgage Lenders reckons there will be a £30 billion shortfall in mortgage funding this year; if so, housebuying activity will dry up and prices drop further.

“Everything hinges on the state of the mortgage market,” said Liam Bailey, director of residential research at estate agents Knight Frank.

“The realities of the mortgage market are beginning to bite and if nothing changes we could see falls of 5%, and in the worst hit areas by as much as 10%. The speed of the change is quite concerning.”

Worst affected are first-time buyers. Some have been waiting for prices to come down so they can get on the housing ladder – only to find that now prices are slipping they cannot get a mortgage.

Rob Williams, a public affairs worker in his late thirties (now not an untypical age for a first-time buyer), is one of those finding himself trapped. For the past couple of years, Williams, who rents a room in a shared house in north London, has worked at two jobs to save a deposit of £25,000. However, with lenders setting tougher deposit terms, it is now unlikely to be enough to get him on the property ladder.

“Saving anything while living in London is a challenge,” he says, “but buying is an even greater one.” He has given up the struggle for now. Tired from endless searches for anything in his price bracket – £180,000 – in north London, he is watching what happens. “I’m going to stay out of the market until prices come back down,” he said. “That or possibly move to France.”

He is not alone, and this could have effects on the wider market. “The first-time buyer has become an endangered species over the last decade,” said Drew Wotherspoon of John Charcol, one of the country’s largest mortgage brokers.

“No new entrants means no one to buy second properties and these ramifications continue up the ladder. The longer this continues, the more problems we are storing up.”

Though he is right, it’s important to remember that buy-to-let landlords are also a strong influence. In recent years they have filled the housing gap left by first-time buyers. Capital gains tax changes coming into effect today, introducing a uniform 18% rate, have prompted fears that a flood of buy-to-let properties may hit the market as owners cash in their capital gains. It could further drive down prices.

This is dismissed by the industry body, the Association of Residential Letting Agents (Arla). Its latest survey of members shows that while 18% of landlords plan to sell some or all of their properties in the coming year, 46% say they intend to add to their portfolios.

Nine in 10 landlords say they would not sell even if house prices fell. Arla claims landlords are benefiting from a strong rise in rentals on their buy-to-let properties.

There are other rays of hope, too. The Blackheath office of estate agents Kinleigh Folkard and Hayward in south London reports constant demand across all their offices in London and the southeast for family period properties. Homes under £350,000 are even attracting sealed bids, such is the competition.

“The mantra location, location, location is key,” said Fiona Smith, the sales manager. “Well-presented properties, close to public transport and away from busy roads are holding their value and still selling within two to three weeks.”

Richard Donnell, research director at Hometrack, is sticking to his prediction of a 1% rise in house prices this year.

“I just don’t think it’s as bad as everybody says it is going to be,” he said. “We’re coming off a very strong base and the demand is there.

“There’ll be some weakness, particularly for new-build city flats, but bread-and-butter family house prices are essentially going to be flat.”

If he’s right, Acacia Avenue will breathe a sigh of relief. If he’s wrong, a new generation will discover that property boom can indeed turn to bust.

Credit crunch Q&A