Mortgage lending fell by 14% in December, compared to November, according to figures released by the Council of Mortgage Lenders (CML).
The CML said £28.6BN was lent by banks, building societies and others to homebuyers during the month; £33.2BN was lent in November.
The figures show that a typical first-time buyer would now expect to take out a home loan 3.31 times the size of their salary. This means that first-time buyers are struggling to enter the market, despite this they accounted for 36% of all home purchase loans in 2006.
Michael Coogan, director general of the CML, said:
"The monthly figures clearly show the cumulative effects of the gradual worsening in affordability for first-time buyers, and the ever-rising proportion of them who are caught by stamp duty.
Although the mortgage market performed extremely well in 2006, the effect of rising interest rates and the continuing decline in affordability are likely to dampen activity somewhat in 2007."
As the first-time buyers are priced out of the market, so will the downward pressure on house prices increase. In other words, the housing market is due for a major correction in the next 18 months.