Skip the debate about whether the housing market is slowing down or heading for a crash – it’s a crash. Estate agents and banks talking about small price increases in 2008 are blind optimists. We can quibble about what constitutes a crash, but after years of boom, house prices are in for a steady period of reversal and will drag the economy with them.

Even if property prices remain flat, that is a real fall that adds up to 10 per cent over four years. I’d look for a real fall of double that – which means an absolute decline.

The optimists’ arguments are that demographics ensure demand; that we have a housing shortage; interest rates are historically low, and falling. They are arguments for the medium term however: they may explain the next boom but we have to have the bust first.

In the short term, the housing balloon is as inflated as it can be without busting. Prices have risen because banks lent the money to pay more, but those days are over. Loan-to-value ratios are being cut by cautious bankers. A 90 per cent mortgage on a £200,000 property leaves the buyer looking for £20,000; if he can borrow only 85 per cent he needs £30,000 – even if the price drops to £180,000 he needs £27,000. So buying gets harder even with prices falling.

But why would a rational first-timer want to buy if prices are falling? If would-be buyers have seen prices fall from £200,000 to £180,000 they wait for £170,000 – then £160,000. For a first-timer such falls wipe out their total equity. So the demand dries up: people unable to buy on the up-side of the cycle would be silly to buy on the down-side even if they can now afford it.

And falls will encourage buy-to-let investors to sell – except that there are pockets of Britain where so much of housing is buy-to-let it will be unsaleable without further massive (and well reported) discounts.

But as prices fall, lenders lower their lending ratios further. And don’t expect them to pass on the full cut in interest rates either.

Housing has driven the UK economy for the past decade. Appreciating capital gave consumers confidence; many released the gain by remortgaging. Take that away and spending power drops sharply, hitting retailers and manufacturers. The consequences are wide as the virtuous circle of rising house prices turns into a viscous circle.

We’ve been here before and survived and we’ll survive this time too. But do accept that we’re in for a few years of gloom, so plan accordingly.

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