Spain's once-booming property market is in freefall, official statistics have revealed for the first time.

The announcement that house sales had plunged has dashed government hopes for a "soft landing" in the sector that has driven the Spanish economy for more than a decade.

The buying and selling of homes fell by 27 per cent in January compared with the same period last year, Spain's National Statistical Institute (INE) announced yesterday. The collapse coincided with a 25 per cent fall in the granting of mortgages, the biggest drop since 2004. The size of individual mortgages has also fallen, by nearly 4 per cent, as providers fear for the security of their loans.

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The indicators published by the state organisation for the first time confirm the widespread fear that Spain's property sector is not just cooling off, but falling sharply. "We have to accept this is not a gentle correction, but a full-blown crisis. We can only hope it will be sharp and short," says Fernando Encinar, a director of Spain's leading online estate agent, idealista.com.

The news will scare millions of Spaniards – and hundreds of thousands of Britons and other northern Europeans – who stretched themselves to get mortgages on homes they believed were a cast-iron investment.

Miguel Blesa, president of the Caja Madrid savings bank, Spain's second leading mortgage provider, warned that things would get worse. "There will be more problems in the property sector in coming months, since the market in new homes is paralysed," Mr Blesa predicted.

"Many people thought that buying property, especially a second or third home, was an investment to make a profit. Now we'll see cascades of these homes up for sale." Mr Blesa was speaking in Vienna, where his savings bank yesterday inaugurated a new headquarters to handle credit lines for big construction companies operating in central and eastern Europe.

The message seemed clear: leading financiers are forsaking domestic homeowners and shunning Spain's burst bubble to boost property development in livelier markets abroad.

The bulk of the transactions – 52.4 per cent – logged by INE were in second-hand homes, where the decline in activity was sharpest – 35.6 per cent. The drop in sales of the remaining 47.6 per cent of new homes was 14.6 per cent. This milder fall reflected developers' savage price-slashing of up to 30 per cent to shift new properties.

"The problem is that many people refused to face up to the slowdown for more than a year, fearing to produce what they most fear. But now it's clear the sector is in crisis, there's a danger people will make things worse by panicking and predicting disaster. It's a herd mentality," Mr Encinar says.

By region, Murcia – the Mediterranean "Costa Calida", which has become a magnet for British homeowners in Spain – remains reasonably active. But prosperous Catalonia saw a dizzying 42.7 per cent drop in property transactions, and Madrid has virtually ground to a halt.

There is still demand, Mr Encinar insists. "But buyers, not sellers, are fixing the price, forcing owners to negotiate. This has never happened in Spain before. It means we can expect substantial discounts in coming months. It could soon be a good time to buy."

Spain's National Construction Confederation, which represents big companies, has pleaded for improved tax breaks for first-time buyers, to halt the downturn. Several high-profile construction companies have gone bust in recent months: with sales paralysed, they could not repay their massive bank loans.