The head auctioneer calls for final bids on Damien Hirst's The Golden Calf in 2008.

Five months ago art sales meant bidding frenzies and standing room only at the top auction houses. Now there are empty seats and unsold lots.

At the peak of the art market boom, which began in 2004 and ended last year, an evening auction at Christie's or Sotheby's unfolded like a Hollywood drama, with billionaires in cameo roles and astronomical prices in lieu of stunts. Like the movies, these sales required a certain suspension of disbelief. The record-breaking prices seemed unsustainable, and yet still they came.

Only five months ago, Damien Hirst put 223 new works up for auction at Sotheby's and made himself £95m. Had his Beautiful Inside My Head Forever sale taken place 48 hours later, he might not have got away with it. Since then, the price of art has fallen off a cliff. Last week's auctions, the first conceived during the global financial crisis, unfolded more like made-for-TV dramas. They were lower budget but more honest, less spectacular but somehow more real.

At Sotheby's on Tuesday last week, there were empty seats. People often come to watch as well as to buy, but here was a sign that spending is declining even as a spectator sport. An area at the back that was standing-room-only last year was now seated, and spaciously so. The previously seething, bitchy press pen was roomy and congenial.

With only 29 impressionist and modern works set to go under the hammer, roughly half the boom-time norm, Sotheby's sale had been dramatically downsized. Josh Baer, a dealer, had flown in from New York anyway. "I bet it will be over in 45 minutes," he said as Henry Wyndham, the auctioneer and chairman of Sotheby's, announced the first lot. During the boom, an evening sale could take two hours - soaring prices take longer to reach.

Not long ago, many people felt the headlines commanded by high prices were damaging to the perception of art. Who cared what critics or curators thought, or what artists were trying to create, when works by Hirst and Koons and Freud were selling for jaw-dropping sums? Now the market is faltering, the same people are hoping for a correction that looks beyond price to the value bestowed on an artist by, say, museum retrospectives and writers.

But in the auction room, money still talks. As Baer predicted, the sale took just 46 minutes. Twenty-two of the 29 lots sold, bringing in a total of £32.6m - a respectable outcome in the circumstances, but well below the £116m total of the equivalent sale last year. Despite the lower prices, the bidders behaved as they always have. Abigail Asher, a New York consultant, acquired a René Magritte by snapping her fingers at Wyndham, as if he were a busboy in a French bistro. José Mugrabi, a dealer said to own 800 Warhols, sat in the fourth row in a blue baseball cap, and casually bought a Juan Miró.

The bidding on one lot did feel like a throwback to the blockbuster boom: Edgar Degas's Petite Danseuse de Quatorze Ans, a bronze sculpture with a real tutu in an edition of 27. John Madejski, the owner of Reading Football club, had bought the Degas five years ago for a flat £5m. Wyndham opened the bidding at £7.6m, and three telephone bidders took the price up and up. Just before bringing down his hammer, Wyndham joked: "Anyone interested ... at £11.8m?" The total price, with buyer's premium, was £13.3m. There was a round of applause as the bronze teenager went to an anonymous bidder on the phone with Yasuaki Ishizaka, managing director of Sotheby's Tokyo office. Sotheby's Alexander Platon explained this jump in price by saying: "The masterpiece market didn't exist in 2004." In the run-up to the sale, he said, Degas's dancer "had made a lot of private trips to people's living rooms". As we left the auction house, Baer offered an alternative explanation: "Art collectors are not rational," he said. "Even they would admit that."

The following evening, Christie's held their impressionist and modern sale. With 47 lots, it was a more lively affair, lasting 64 minutes and bringing in £63.4m - almost a million a minute. Christie's chairman, Ed Dolman, described it as "reassuring", while Thomas Seydoux, Christie's co-head of impressionist and modern art, explained with some glee: "The pound dropping was super, super helpful."

Seating at an auction, as at a fashion show, is no arbitrary matter. It is the brutal means by which the auction house tells the world what it thinks of you: only the most powerful players score an aisle seat in the first 12 rows. Laurence Graff, the world's foremost diamond dealer, is one of these. Two months ago, he spent £16m on a diamond at Christie's. Last week, he acquired sculptures by Henry Moore and Alberto Giacometti. After the sale, I asked Graff why the economic turmoil wasn't curbing his spending. "Cash is rotting," he said. "Anything in banks could get lost. Many are afraid to get involved in complicated financial instruments. So clever people are investing in solid assets like serious art."

Two of the night's most successful lots were consigned by a "private European" rumoured to be a Turkish banker based in Switzerland. Claude Monet's Dans la Prairie, an image of the artist's wife in a meadow, and Henri de Toulouse-Lautrec's L'Abandon (Les Deux Amies), a picture of two women on a bed in a brothel, went for £11.2m and £6.2m respectively. The Turkish collector's other four consignments didn't fare so well: a Paul Gauguin landscape sold for under the low estimate, while his Renoir, Bonnard and a less exciting Monet didn't sell at all.

It could be that the market is seeing a shift in taste, away from chocolate box images to more edgy art. Renoirs and Pissarros failed to find buyers last week, while paintings that sold above their high estimates included a mother with cross-eyed child by Amedeo Modigliani and a corpse-like androgyne by Gustav Klimt. Gone are the decorators and speculators, who threw money at unthreatening, commercial paintings in easy-to-install sizes; in their place are art lovers who enjoy thought-provoking work at lower prices.

At Sotheby's contemporary art auction last Thursday, the first sale of the week, you could hear laughter as dealers and collectors took their seats. They appeared relieved by the success of the Christie's sale the night before. Mark Vanmoerkerke, a Belgian collector who usually bids on the telephone, had decided to attend for a change, explaining: "I wanted to sniff, smell, or should I say taste the mood of the market." (Collectors often liken art market calibrating to wine tasting.) With only 27 lots, the contemporary sale took just 41 minutes, the fastest yet, and 92% of the lots were sold, an indicator that the market hadn't seized up. But the auction brought in only £17m - a fifth of last year's February total. In 2007 and 2008, auction revenue on postwar and contemporary art exceeded that of impressionist and modern for the first time. This is unlikely to happen in 2009, as collectors return to the safe haven of dead artists.

Indeed, Sotheby's lost money on Bridget Riley's 1974 Gala, a wave painting with a wonderfully trippy optical effect. The auction house had guaranteed the consignor an undisclosed sum rumoured to be £1m. On the night, it sold for only £735,650 with fees; Sotheby's will have to make up the difference.

One piece that bucked the general downward trend was Anish Kapoor's 1996 Untitled concave mirror. It exceeded its high estimate, selling for £982,000. Nicholas Logsdail, the owner of Lisson Gallery, which has represented Kapoor for 27 years, explained: "His work has appeal in the far east, the Middle East, and in the traditional European and American markets." As for the current market, Logsdail said: "It's more stable in a funny way, because it's not dominated by herd instincts and speculative money."

But if it is more stable, it has also shrunk dramatically - and the art world is contracting as a result. Sotheby's and Christie's have announced lay-offs; many commercial galleries are pruning staff and extending the duration of their shows. Art students who graduate this summer will find it hard to get jobs as installers or assistants, let alone get representation from a gallery. By 2010, fewer people will be able to refer to themselves unapologetically, unreservedly, as artists. The drama of the auction room, whether a humdrum soap or the white-knuckle thriller of 2008, is part of art's lifeblood.