Every spring the great and the good from the worlds of property and finance gather at the Dorchester Hotel in central London to listen to the words of the real-estate maven Gerald Ronson over a sumptuous lunch. What they heard from the Heron International boss this year was stomach-churning. The credit free-for-all of recent years had brought all kinds of amateurs and speculators into the marketplace and now we are all suffering the consequences.
In the Midlands and the north prices of new residential properties are down 40 per cent to 45 per cent and in London - despite the optimism often heard around dinner tables - prices have dropped 20 per cent to 25 per cent from their peak. In Ronson's view, among the reasons for this calamitous drop in new home prices is that local authorities and builders have not been giving people what they want.
The government's demand for building on "brownfield" sites, driven by John Prescott when he was in government, has led to the development of thousands of unwanted inner-city apartments in the big northern cities. Yet the demand from young aspirational families is for new homes with a front door, a garden and a garage for the car.
None of this is good news for Gordon Brown. Plugging the gap in affordable housing was one of his first pledges when he arrived at No 10 last year. He would set the housebuilders the ambitious target of constructing three million new homes by 2020. Instead of building new homes the main housebuilding companies are putting their mechanical diggers in storage.
Britain's largest stock-market-quoted housebuilder Persimmon announced last month that it is putting its planned developments on hold, following a sudden worsening in the housing market. Sales of its new homes have plummeted 25 per cent so far this year, with the chief executive, Mike Farley, blaming a shortage of housing finance.
There is no reason to believe that this situation will be repaired soon.
The credit crunch has burst the housing bubble. Before the credit markets froze on 9 August last year there were more than 100 lenders offering deals. The number of mortgage companies has now dropped to 30, of which only five or six have the capacity to make loans. Without the necessary finance the housing market will remain stagnant.
Some people will see this as no bad thing. The housing boom, fuelled by heavy demand and cheap credit, froze young people out of the market. It also contributed to the credit boom. During periods of rising prices people are able to extract equity from their homes, remortgage and spend the cash.
The so-called "wealth effect", the feeling of richness which comes with surging house prices, encourages consumption. The process of adjustment involves necessary pain. The fear of government and mortgage lenders is that the crisis in housing finance could go too far. As people find it difficult to meet loan repayments, the residential market could be sucked into a downward spiral, dragging the banks with it.
This is a key reason why the Bank of England launched a rescue fund for mortgages, creating a "Special Liquidity Scheme" with the goal of persuading banks to lend to each other. If the credit markets can be unfrozen, then mortgage rates can be normalised.
Under the scheme, the high-street banks will be able to exchange mortgage debt, hard hit by the global sub-prime crisis, for Bank of England bonds. These, for all practical purposes, are as good as cash. It is understood that the Bank is prepared to issue up to £100bn of the bonds, if that is what is necessary to rekindle the credit markets and start repairing the housing market.
The nasty reality is that this is not likely to happen quickly. Major forecasters such as Capital Economics are lowering their forecasts for house prices. Overall they expect the market to decline by 8 per cent this year and a further 10 per cent next year as the economy slows dramatically. The mortgage lenders have had a nasty fright. Several, including Northern Rock, have all but gone bust or withdrawn from the market. Those that remain are returning to a pre-Thatcherite approach to lending, when people needed a deposit before buying a home and could only borrow two and a half or three times earnings, as opposed to 120 per cent mortgages and four or five times earnings.
Moreover, once housebuilders have stopped building, it will need real signs of recovery for them to become less risk-averse. Politically, the poor state of the housing market and the lack of affordable homes could be a bigger threat to Brown than the 10p tax-band crisis.
Alex Brummer is City editor of the Daily Mail