By Julia Berg
BBC Money Programme
The number of first-time buyers may fall even more, lenders warn
Escalating property prices have been a staple of dinner party conversation for years. But in the last year, they have been replaced by a new topic: falling property prices.
There is no doubt that many people made a lot of money out of property in the last 10 to 15 years, while many others in their 20s and 30s have seen their dream of home ownership slip away.
But we all knew the bubble that was getting ever more inflated, couldn't last forever and would eventually burst.
Burst it did, around autumn last year - and we have been on an economic downward spiral since then.
Now we are seeing people struggle with sudden increases in their mortgage payments, while repossessions have risen to a predicted 45,000 this year (already up 71%).
The property market is a market in which prices go up and down... liquidity can dry up much more easily than in a stock market
Collapsing house prices are plunging 60,000 homeowners a month into negative equity and at current trends, two million households will enter negative equity by 2010, outstripping the 1.8 million affected at the bottom of the last housing slump.
Given all this and the predictions that the country could be on course for a worse crisis than the 1990s crash, some are starting to question whether it was such a good idea for the housing market to become a cornerstone of the British economy.
Furthermore, we haven't hit the bottom yet. House prices are predicted to drop by another 15% in many areas and many believe they will not be back to 2005 levels for at least a decade.
For those able to hang on to their homes and stay put, this may not be a problem. They will be able to return to the dinner party circuit and much like stock holders who hold their nerve, sit it out and wait for the recovery to begin. After all, you only realise the loss if you sell.
The property market is not always the sure-fire investment we think it is
But it has been a sober illustration that property investment carries risk, and that this is a risk exacerbated by gearing - the amount you have borrowed to make the purchase.
Merryn Somerset Webb, editor of MoneyWeek says; "When you buy a house, you borrow a lot of money to do it. So say you'll put down £10,000, you'll borrow £90,000.
"When you invest in the stock market, you don't borrow money to do it, you simply invest the money that you have.
"That means that you could lose everything you've put in to the stock market, but you'd still be evens, you wouldn't owe anybody anything.
"With a property, say you've put in your £10,000, the value of your property falls by £15,000, you still owe the £90,000. You have a debt that could hang over you indefinitely.
"So, in that sense, investing in property is more risky than the stock market."
The question is: if you step back and look at property in comparison with other investments, is it really the money-spinner many of us have been led to believe?
Average house price (1980): £23,348
Average house price (2000): £81,202
Deductions: Stamp duty £233, legal and other fees £700, maintenance £16,126, mortgage interest £41,091, capital repaid £14,942
Overall loss: £15,238
Sources: Nationwide, Savills, MoneyWeek
What if, instead of sinking a large sum of money into a house and borrowing three to seven times your salary at various rates of interest over 20 years, you saved the money into a UK shares fund instead and rented?
How would your investment work out? We all know that shares can rise as well as fall, but is it the same for investment in property?
With the help of MoneyWeek, we compared four random time periods and looked at buying property versus renting and investing to see what would happen. The results are surprising and show just how much of a lottery home ownership is.
To begin, we looked at what would have happened if you bought a house in 1980 and sold it in 2000. We started with the average price of a UK house in both those years.
Then we deducted a typical deposit, stamp duty, solicitors and set up fees, maintenance, mortgage interest payments to see what profit (if any) was left.
Rental cost of average house (1980-2000): £80,630
Gain from buyer deposit if invested in shares: £101,339
Gain from other costs if invested in shares: £21,179
Overall gain: £41,888
Sources: Savills, Barclays Equity Gilt study, MoneyWeek
We compared that with taking an initial 20% deposit and set up costs (like solicitors fees) and investing them instead in a UK equity income fund over the same period (see Barclays Equity Gilt study 2008).
The conclusion will surprise many.
Based on these figures over this period, the average homeowner would have made a loss of £15,238. Meanwhile, the renter/investor would have made a gain of £41,888.
Note: we made several assumptions, such as the amount of deposit on the house (we assumed 20%) and some assumptions about average rental costs over early periods because of the lack of reliable data.
We have also not included the potential saving a renter would have made by not incurring mortgage interest payments and maintenance costs - the biggest costs incurred.
Had a renter invested these savings as well, the calculation would be even more in their favour.
Timing is everything
However, when we looked at three shorter seven-year periods, the figures came out very differently. In the period 1993 to 2000, both the renter/investor and the property owner would have made a loss.
However, the property owner comes out comparatively £15,000 better off, having lost just under £16,000, whereas the renter/investor would have lost just over £31,000.
In the other two periods, 2001-2008 and 1995-2002, the house buyer comes out much better, given these were periods of rapid house price rises and a more volatile stock market, particularly during the period 1995-2002 which suffered the dotcom crash.
Many of us remember the last housing downturn and the recession of the 1990s.
But for an entire generation of young homeowners, desperate to get on the housing ladder and follow a previous generation into becoming property millionaires, this exercise illustrates that far from property being the goldmine many have imagined, it is like investing in shares, a lottery - where timing is everything.
Property: End of the Affair?, BBC 2, Thursday, 13 November at 1930.