Only 516,000 mortgages were taken out for house purchase during the year – 49pc fewer than during 2007, according to the Council of Mortgage Lenders.
Net lending, which strips out redemptions and repayments, for all types of mortgage also dived sharply, dropping to £39.7bn in 2008 from £108.2bn a year earlier.
There was a steep fall in the number of first-time buyers getting on to the property ladder, with only 194,200 people buying their first home during 2008, 46pc fewer than in 2007.
The drop in first-time buyers continued during December, with just 12,100 people taking out loans collectively worth £1.4bn – the lowest levels since the CML's monthly records began in 2002.
First-time buyers have been hit hard by banks and building societies tightening their lending criteria, and they now put down an average deposit of 22pc of their property's value, the highest level in the 34 years of available data.
At the same time house price falls and the economic uncertainty have caused many people to delay plans to get on to the property ladder.
The CML also reported an 18pc fall in the number of people remortgaging during 2008, as the combination of low standard variable rates – the rate that most borrowers revert to after their existing deal comes to an end – and tighter lending criteria meant that many people were better off staying where they were.
Around 870,000 people remortgaged during the year, compared with 1.06m in 2007. Overall, lenders advanced a total of £257.7bn in 2008, compared with £363.8bn in 2007.
Michael Coogan, the CML's director general, said: "The shortage of mortgage funding and reduction in the number of active lenders has reshaped the mortgage landscape in the space of a year.
"This low level of transactions is insufficient for the functioning of an efficient market. Measures are now in place to seek to restore the flow of funding to the mortgage market, but this will take time to feed through."
He warned that further action may still be necessary to increase transactions, stabilise prices and restore confidence. The CML has previously warned that net mortgage lending will turn negative during 2009.
It expects net lending for the year to be minus £25bn, meaning that home owners will collectively repay £25bn more to lenders than they borrow.