House slump has put thousands of first-time buyers in negative equity

The sector seeing the biggest falls across London are one- and two-bedroom flats, typically purchased by new home owners getting a toe-hold on the property ladder.

A comprehensive survey of sale prices in 15 districts in March, ranging from one-bedroom flats to large family houses, is the strongest evidence yet that thousands of young buyers mortgaged to the hilt are already being saddled with negative equity.

The value of one- and two-bedroom flats, the most common first-time buyers' purchase, has fallen by about 10 per cent in a year in popular areas such as Battersea, Blackheath and Islington.

In Battersea, the worst-hit part of London, a one-bedroom flat is now worth £27,500 less than a year ago and a two-bedroom flat £42,500 less.

In Islington the average one-bedroom flat will now fetch £35,000 less than last year, and the two-bedroom £40,000 less.

Only in a handful of mainly expensive areas such as St John's Wood and Wimbledon have small flats held their value, according to the survey, compiled for the Evening Standard by estate agency Winkworth, which has 78 branches in the capital.

Experts say smaller, cheaper starter homes are most vulnerable because of the drying up of mortgage finance to buyers with small or no deposits.

All high street lenders have scrapped their 100 per cent mortgages as they withdraw from "high risk" sectors of the market.

A succession of surveys has shown the number of mortgages approved by banks and building societies collapsing by 40 per cent or more in the past year, to levels not seen since the early Nineties crash.

Lenders have also pushed up the rates on new loans because of the fallout from the credit crunch and to improve wafer-thin profit margins.

Banks are having to pay about six per cent interest to borrow money in the City markets and are passing on this higher cost to homebuyers.

A third factor has been first-time buyers' unwillingness to pay above the £250,000 threshold for three per cent stamp duty, according to agents.

The price fall trend becomes less pronounced in the three-bedroom flat and house market, generally out of reach of first-time buyers.

Here the percentage drops are lower - for example three per cent for a three-bedroom house in Hammersmith and 2.5 per cent in Hackney. But the troublespots remain the same. In Islington three-bedroom flats have lost £55,000 in a year - about eight per cent - and three-bedroom houses £75,000, some nine per cent. In the market for four-bedroom properties, where buyers are much less likely to need high "loan to value" mortgages, conditions are more settled. In Tooting, Wimbledon and Kentish Town the value of family homes is unchanged.

In others such as Hammersmith and Clerkenwell there have been small falls. Even at this "safer" level of the market some areas are experiencing big drops in value.

In Battersea, an area that has seen rapid gentrification during the boom years, four-bedroom homes are nine per cent, or £100,000, off their peak average of £1.1 million. In Islington, the fall is also eight per cent, from an average £1.65 million to £1.5 million. Winkworth managing director Dominic Agace said: "It has been a tough few months for the property market. We have seen a 30 per cent reduction in sales.

"I don't predict any price rises for the next 12 months at least. Buyers are not willing to compromise and, with numbers down by 25 per cent, they are in the driving seat."