The Council of Mortgage Lenders has forecast a 35 per cent fall in the number of property transactions in England and Wales this year.
The organisation, which represents banks and building societies, is also braced for house prices to sink by around seven per cent in 2008.
The CML updated its forecasts at the same time as it reported gross mortgage lending of around £25.3 billion in April, a five per cent increase from March but an eight per cent decline on the same month a year earlier.
For March and April combined, stripping out the impact of the early Easter, lending was down 16 per cent from 2007 levels, the CML said.
In October, the CML said it expected house prices to rise one per cent in 2008, with property sales likely to be broadly stable at just over one million. Now it reckons the number of transactions will be down on last year at 770,000.
The CML said there were some crumbs of comfort for the market, despite expectations of a sharp slowdown. It said outlook for mortgage arrears and repossessions was unchanged, which it said reflected the fact many borrowers coming off fixed rates onto higher rates appeared so far to have managed the "adjustment well".
CML director general Michael Coogan said the forecasts also assumed that actions taken by the Bank of England to improve liquidity would begin to have an effect in the mortgage market in the later part of the year.
He added: "Over the next few months, lending volumes will get worse before they get better.
"The market is still very uncertain, but lenders are working hard to ensure that borrowers coming off fixed rates remain on track, that arrears and repossessions are minimised, and that pricing is as attractive as they can make it in a market where they must manage the demand for lending with caution."
The CML said it expected the Bank of England’s base rate to finish this year at 4.75 per cent, representing one further cut in borrowing costs. Gross lending will be around 21 per cent lower than last year at £285 billion, it added.
The seven per cent decline anticipated for house prices this year is in line with the warning from Housing Minister Caroline Flint that prices "at best" are set to fall by between five per cent and 10 per cent.
She also briefed colleagues that housebuilding was "stalling", adding: "We can’t know how bad it will get."
The assessment emerged when Ms Flint allowed a sheet of typed notes to be seen by photographers as she entered No 10 for a weekly Cabinet meeting.