A 29% fall in house sales in January compared to December is being blamed on inclement weather, rising inflation and government spending cuts.
The Council of Mortgage Lenders, which has collated the data, said an "unusual combination of factors" have led to the extreme drop, which is "greater than seasonal factors alone would explain".
"With spending cuts beginning to bite, and rising inflation and tax measures putting pressure on household budgets, potential house-buyers are likely to have been discouraged. This, coupled with December's extreme winter weather, and uncertainty over future interest rate rises, has led to a lack of movement in the mortgage market," it said.
The value of house purchases fell by 26% from December to January, and by 13% compared to January 2010. However the CML said that the rush to purchase at the end of 2009 because of the stamp duty concession ending led to an artificially low level of lending in early 2010. This means the 13% year on year fall is much more substantial than it appears.
The fall in house purchase lending was split equally between first-time buyers and home movers. First-time buyers took out 10,500 loans worth £1.2bn in January, down 28% by number and 29% by value from December. Home movers saw a fall of 29% by number from 25,400 to 18,000 and 28% by value from £4bn to £2.9bn from December to January.
The number of remortgage loans also fell from December to January, but by a much less severe 6%, while the value fell by 7%.
Michael Coogan, CML director general, said it would be premature to draw any conclusions about activity levels over the next few months from the January figures. He added: "The market remains stable at low levels of transactions."
His comments are supported by Brain Murphy, head of independent mortgage broker Mortgage Advice Bureau, who reports an upturn in mortgage queries in February.
"Activity overall witnessed a marked increase in February over January both among house buyers and those looking to refinance existing arrangements," he said.
"In a normally functioning market borrower activity tends to rise month on month during the first half of the calendar, generally plateauing during the mid-summer holiday season followed by an autumn uptick, before hibernating as the Christmas period approaches.
"As a result we are mildly encouraged that the market appears to be following its more historic pattern, albeit at significantly lower volumes than at the height of the property boom.
However Howard Archer, chief UK economist for Global Insight, is more bearish. "The very weak CML mortgage advances data for January indicates that the housing market started 2011 on the back foot and supports our belief that house prices are headed down further over the coming months. Specifically, we expect house prices to fall by around 5% in 2011 and ultimately decline by around 10% from their peak 2010 levels."
