The grim news has been coming thick and fast for the housing market in recent days. The Halifax says that house prices fell by 2.4% in May and by more than 6% over the past three months. Even this, however, was perhaps not as gloomy as the Bank of England’s latest figures for mortgage approvals. These showed not only the extent to which housing activity has slumped this spring, but also the credit crunch in its full glory.

Until recently, the fear was that existing borrowers keen to remortgage this year would be unable to do so on acceptable terms. That is not the case, so far at least. Some 106,000 people remortgaged in April, 7% up on a year earlier, according to the Bank.

The crunch is instead biting savagely on new mortgages and - as Richard Donnell, director of research at Hometrack, pointed out here last week - on first-time buyers. New mortgage approvals slumped to 58,000 in April, 49% down on a year earlier, and easily the lowest on record. Earlier data from the British Bankers’ Association had suggested the numbers might show a small rise from March. It is important not to confuse the number of mortgage approvals with the level of housing transactions: cash and other nonmortgage purchases mean approvals account for perhaps 70% of sales. Even so, the trends are clear.

So, is it downhill all the way for mortgage approvals, and thus for housing activity and prices? The most recent case of a sharp drop in approvals was in November 2004, when approvals slumped to 76,000, 42% down on a year earlier. Homebuyers were deterred by rising interest rates, prices were slipping and there were fears of a big price correction. Demand for mortgages slumped.

The moment passed, partly because the Bank of England stopped raising interest rates, partly because potential buyers decided the crash fears were misplaced and partly because banks and building societies, anxious to boost their lending, offered attractive mortgage deals to persuade cautious purchasers to take the plunge. A year later, in November 2005, approvals were up by nearly 50%. The mid1990s saw a similar bounce in lending.

The current situation is different, starting as it did with a sharp reduction in mortgage supply to new borrowers. So far, this has been a supply-side squeeze on the housing market rather than a collapse in demand. The first requirement, therefore, is that lenders become both readier and more able to lend. That will happen, but slowly – their caution has been reinforced in recent days by Bradford & Bingley’s travails. It is quite possible that, by this time next year, the supply squeeze will be behind us, permitting the kind of lending bounce seen in 2004-05.

What about demand? Consumer confidence is weak and some of the headline-grabbing numbers for falling prices, although not representative of the whole market, are enough to put off even determined buyers. Many in the trade say that demand is still there, but frequently frustrated by lack of finance. The industry has to hope this remains the case when mortgage conditions ease.

home.economics@sunday-times.co.uk