The lender said that the lack of first-time buyers was “casting a shadow” over the outlook for the wider housing market, given how crucial the sector is to maintaining the flow of the property market.

Nationwide said the housing market was “treading water”, with its house price index revealing that house prices increased 0.3% in February following a 0.1% drop the previous month.

The three-month-on-three-month change was -0.1%, while property prices were 0.1% lower than a year ago at £161,183.

Nationwide said the proportion of first-time buyers has remained surprisingly constant in the last few years, at 37% in recent months compared to 40% in 2007.

However, it noted that employment prospects for younger people are very difficult, with unemployment among 18- to 24-year-olds, who make up a fifth of first-time buyers, increasing to more than 18% at the end of 2010 from 12% in 2007.

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Graduate unemployment has doubled to 20% in the same period, compared to unemployment for the population as a whole rising to 7.9% from 5.3%.

In addition, wages for 22- to 29-year-olds fell 6% in real terms between 2007 and 2010 compared to 3.7% for the average worker.

Robert Gardner, chief economist at Nationwide, said: “The number of first-time buyers is only likely to increase substantially when labour market conditions strengthen.

“With the UK economic recovery set to remain fairly modest, the improvement in employment and wages is likely to be slow going. This in turn suggests that first-time buyers will be slow to return to the market, further reinforcing our view that the housing market will remain sluggish through 2011.

“The most likely outcome is that wages will outpace house price growth over many years, gradually improving affordability over time.”

He added that housing stock needs to grow at the same pace as the number of households in order to allow affordability to improve. But he said that loosening credit conditions would not solve the problem and could be counter-productive.

Gardner said: “Since the supply of housing is fixed in the short-term, a sharp increase in demand would put further upward pressure on prices, making the fundamental affordability constraints even more pronounced.”

Nevertheless, Nationwide found that demand has levelled out alongside continuing low interest rates and some stabilisation in the labour market. It said there were no signs of a glut in supply, with sellers remaining reluctant to accept lower prices to secure a sale, so continuing to stretch buyers’ affordability.

Affordability remains a major constraint, with the average deposit now 21%, while housing remains expensive at around five times the average income, compared to a long-term average of four times.

Gardner said: “Given that the recovery hit a soft patch at the turn of the year and looks set to remain sluggish in the year ahead, the property market is likely to follow suit, with relatively low transaction levels and prices moving sideways or modestly lower through 2011.”