The latest batch of economic and housing market data has not brought much cheer. Official estimates of economic growth for the second quarter and the latest retail sales data make depressing reading. Mortgage approvals, meanwhile, hit a new low of 36,000 in June, according to the Bank of England.

None of this bodes well for an early recovery in house prices. Data released by the Nationwide on Thursday showed the price of the typical house fell by 1.7% in July, making an 8.1% drop over the year - and pushing values back to the levels of August 2006.

There is obviously more than one factor behind falling activity and house prices. Affordability has been deteriorating for ages, but the tipping point was the drying up of mortgage funding as a result of the credit crunch. This is what Sir James Crosby hopes to address in his review of possible actions to restore the mortgage-backed securities market.

The tight credit conditions that have resulted from the blockage of the funding markets have clearly played a role in slowing activity, especially for the most hard-pressed borrowers trying to access higher loan-to-value ratios. As many of these are likely to be first-time buyers, who would normally add liquidity to the housing market and shorten the length of chains, this also does not bode well for an early pickup in activity. Restoring liquidity to the funding markets will eventually help the market to recover, especially if it brings mortgage rates down with it, but it seems unlikely to have much effect on prices in the short term.

This is partly because it will take some time to implement any measures that Crosby comes up with – and his final report is not due until the autumn – but also because market confidence is trumping everything else right now. Consumers expect prices to continue to fall, while lenders see declining values and a faltering economy as significant risks.

Until investors, borrowers and lenders are more confident about where the bottom for house prices and the overall economy is, there is little likelihood of a rapid pickup in activity, irrespective of which new market structures – if any – emerge from the Crosby Review.

Fionnuala Earley is chief economist of Nationwide Building Society David Smith is away

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