HOUSE prices fell at the fastest rate on record in July, knocking £15,000 off average UK values; mortgage offers tumbled 64%; and Sir James Crosby, parachuted in by the Treasury to kick-start the property market, warned that things will only get worse until the end of 2010.

His unremittingly grim interim report concludes there will be precious little money for new mortgages, no reprieve for eye-watering monthly repayments, moving will become impossible, house prices will continue to collapse and repossessions will soar.

But pain will not be confined to property owners. The Home Builders Federation has warned of the dire consequences for the jobs of the 300,000 employed directly in the UK building industry, while Homes for Scotland revealed that 15,000 jobs had already gone.

The Federation is calling for urgent action on stamp duty, interest rate reductions, new tax reliefs for homebuyers and the postponement of the compulsory Home Reports due to start in Scotland at the end of the year.

The writing is also on the wall for thousands employed in mortgage broking, estate agency, surveying, and solicitors' offices. Planning departments will also be hit.

Financial institutions are already under pressure. Lloyds TSB and HBOS both announced a fall in profits of around 70%, topped by Friday's 99% hit at Alliance & Leicester, where profits for the first six months dropped from £290m to £2m.

Little wonder that mortgage lobby groups are calling for a variety of measures to free up the wholesale markets so banks can raise money and begin lending again.

Yet Crosby is sceptical. His interim conclusion seems to be that such moves might cause more problems than they solve, not least by encouraging irresponsible lending in the future. Certainly, the Treasury is thought to have little appetite for bailing out the banks using taxpayers' money.

Is it possible, then, that this deeply unpopular Government will sit on its hands and do nothing as we head towards a general election in 2010?

As one banking source said: "The political factor will be the driver here. They will need to be seen to be doing something."

And Building Societies Association chairman John Goodfellow agreed: "We are going to have an awful 2008, 2009 won't be much better, and then we are heading straight into an election. It won't just be about Labour. All the parties will be looking closely at what policies they can offer the electorate to get the market going again. It will be for the people to decide at the ballot box."

The other risk with the 'do nothing' solution is that the correction to property prices currently under way will overshoot badly as they lurch downwards, leading to a serious slump. So what are the options before the Government and how did we get here in the first place?

Traditionally, the wheels of the mortgage market kept turning because institutions took deposits from savers and lent them to housebuyers, adding something to cover their expenses and profits.

However, over the past decade, what is called the wholesale market developed. Instead of individual savers funding individual mortgages, banks packaged up their loans in a variety of securities and sold them on to professional investors, largely other banks and pension funds.

These activities grew exponentially, helping to fuel the property bubble. By the end of 2007, roughly two-thirds of the money needed to meet new mortgages was raised on these markets.

Following the credit crunch, they shut down. Not only does this mean there is no cash for house purchase but half the £257bn currently backing existing loans will need to be refinanced over the next three years. Banks must find a new £40bn annually to maintain their existing commitments. This they will struggle to do, not least against the background of new accounting rules forcing them to hold more capital, to prevent a rerun of the current crisis.

Yet, with household budgets under pressure, the alternative strategy of reinvigorating the savings market to raise cash will be equally challenging.

HBOS, for example, is now only lending as much as it raises from savers, pushing its natural 20% share of the market down to 7% of new lending. But it plans to reduce its exposure to the wholesale markets further by using retail deposits to partly replace securitised loans as they come up for renewal.

As Britain's biggest lender, this will seriously restrict activity in the property market, where the bank expects prices to fall by up to 20%. Gloomier forecasts see them slumping by 35% or even 40%.

Crosby, former HBOS chief, seems to favour allowing the market to work through the problem, possibly helped with simpler and more transparent products which are forced to meet new international standards, potentially a gold standard.

Another option is to allow the Bank of England to extend its current Special Liquidity Scheme, whereby it allows banks to swap mortgage securities for gilts, to include those being raised to make new loans, rather than just continue existing funding.

Finally, the Council of Mortgage Lenders has called for the Government to boost confidence by guaranteeing high-quality mortgage-backed securities, thereby allowing investors such as pension funds to swap them for gilts if they wanted to sell in a hurry.

However, observers believe that given the urgent need for a political fix, we should expect more voter-friendly proposals such as those put forward by the Home Builders Federation.

Goodfellow said: "Rigging the market can be a very dangerous game, so I take the Crosby report with a mild pinch of salt. What we need to do is boost confidence through a stamp duty holiday or some special measures for first-time buyers."

Another source added: "Fiddling with the wholesale markets means nothing to consumers. If they do anything, they will introduce measures that appeal to the psychology of the public and win votes."