Professor Paul Cheshire predicts London property is long overdue a price correction. But could values really fall 40 per cent and bring about the return of 1990s scale negative equity?

When it comes to volcanoes it’s not necessarily the biggest bang that causes the most problems. One that goes off like clockwork can be avoided, but it’s the sneaky ones that go quiet for a while that you look out for. It’s one of natures cruellest tricks that the ash left over from a long ago eruption can prove the most fertile farming ground, luring in settlers who make their home on a ticking time bomb.

According to experts London’s property market may well be that volcano. It’s certainly proved fertile ground for investors since the crash of the 1990s. As Miles Johnson put it in the Financial Times, “Anyone who threw a dart at a London estate agent’s brochure over the past three decades will have generated a fabulous return.”

But the days of London as a safe investment may be numbered. Paul Cheshire, professor of economic geography at the London School of Economics told the Mail on Sunday: “We are due a significant correction in house prices.” Mr Cheshire, a former government housing advisor, predicts prices could fall as much as 40 per cent.

Sudden property price drops can bring on the upside down world of negative equity, where the value of your property no longer outstrips the mortgage. As 2009 dawned a 20 per cent drop in house prices put 1.2 million households into negative equity.

The beggars may not quite be raffling the bank notes yet but down in Knightsbridge an aristo is selling tickets to win a £1 million flat at £5 a pop. Lord Roger Hickman is putting the two bedroom property on into a prize draw to raise money for charity. With only 73 years left on the lease most mortgage lenders would look at it askance and extending will be pricey.

A £1.25 million home in Blackheath is being raffled for £5 a ticket and comes with £12,000 or crystal chandeliers, or you can put down £2 to try and win a six bedroom home in Lancashire. The last craze for raffling properties came at the end of 2008 as the credit crunch began to bite.

Wage inflation has utterly failed to keep pace with rising property prices. Now even a city salary won’t help much towards a deposit. When even bankers need to bank on the Bank of Mum and Dad you know things are unsustainable. Even getting on the ladder isn’t a guarantee of everlasting propertied bliss. Second steppers are struggling to raise the capital to move up too. The Bank of England is discussing the possibility of an interest rate rise to combat inflation, hiking mortgage repayments.

Rather than a bubble bursting it’s more likely to be a slowly deflating balloon. There’ll be many a rude noise, but hot air has to escape somewhere.

There’s been no building boom to mirror the late eighties. If sub prime property prices drop the pent up demand will see first time buyers break the fall.

Lenders seem to have learnt their lesson this time. At the end of April TSB pulled out of providing mortgages for first time buyers in central London, citing a fear of negative equity. Estate agents have dropped the bullish act and called for sensible pricing over over-valuing.

Here the volcano metaphor is once again fitting. Eruptions can be broadly ordered into two categories. Explosive eruptions, such as the type that did for Pompeii, see boiling hot magma thrown into the air in a destructive pyroclastic flow. These are the crashes of the early 90s and late 00s. An effusive eruption on the other hand spews out viscous lava that takes a more meandering path. With caution and foreword planning a major disaster can be avoided.

For property this means caution. Those who had the luck and resources to buy after the boom and bust two decades ago might be attached to the hypothetical value their homes accrued but prices can’t climb forever.

The heyday of property flippers and buy-to-let landlords is over, but there aren’t many sad to see them go. The biggest risk is first time buyers over stretching themselves, taking on mortgages they can barely afford on properties that might not actually give a good return on investment. Falling property prices will hurt those last on the ladder the most.

Edit: An earlier version of this article stated that the Blackheath raffle had been blocked by the council, but it has been reinstated as of June 26.