There is lunchtime bingo at the Judge's Chambers, beef-burgers at Sunny Jim's. There are piles of the Daily Mail, Sun and Heat magazine for sale at the News Box and the Bankinter is wooing prospective depositors with the come-on: "It's good when a bank speaks the same language as you." This is Orihuela Costa, the town with the largest percentage of British people anywhere in the world outside the United Kingdom.

In the town hall office, flanked by a framed photograph of King Juan Carlos and the flags of Spain and the European Union, sits Bob Houliston, the quietly spoken Geordie whose surprise election this May allowed the party which he helped to form wrest power from the mighty Partido Popular, which had ruled the roost on this stretch of Spain's Costa Blanca since the end of the Franco era.

"Thirty years ago there were just a few trees here," says Houliston, who spent 10 years in the diplomatic service and a further three decades in the European Commission before retiring here with his Spanish wife, Isabel. "Now there are 30,000 people living here. It's been a very radical change."

Benidorm, further north along the coast, may be the most famously transformed fishing village in the world, but it is mainly a tourist destination, while Orihuela Costa caters for those seeking, in a phrase used unselfconsciously by local estate agents, to "live the dream".

An estimated one million Britons now live for all or part of the year in Spain. It is one of the most remarkable European migrations of the last half century. Large-scale population shifts are normally driven by economic factors, whether desperate necessity or a desire for the "better life", but the great British exodus to Spain had different engines. An escape from gloomy old Britain to a less frenzied existence in the sun.

Fifty years ago, such escape routes were available only to well-off Britons, who could buy a villa in the Bahamas or the Côte d'Azur or Tuscany. Cheap flights, a strong pound and a British property market which created almost instant wealth made a fantasy realisable for hundreds of thousands of people of more modest means. Houses in Spain couldn't be built fast enough. Great swathes of the coast and countryside became clustered with urbanisations, instant housing estates thrown up to cater to what seemed to be an endless stream of Britons, Germans and other northern Europeans now able to live the kind of life abroad of which their parents could only have dreamed. Developers, estate agents, builders, had never had it so good.

Three years ago came la crisis – the economic crash – and with it the collapse of the property market. Now estimates of the number of empty, unsold properties in Spain vary between 700,000 and 1.5m. Abandoned, half-finished, ghostly urbanisations abound. Ten years ago, an expat who wanted to return to Britain could easily sell their Spanish property. No longer.

Last week, the Office for National Statistics announced that emigration from Britain last year was at its lowest since 2001, a potent sign of the end of the great British exodus to Spain. In October this year, the National Institute for Statistics in Spain reported that, for the first time in a decade, the number of immigrants leaving the country outnumbered those coming in. Those departing may be mainly Latin Americans, eastern Europeans and a number of Britons thrown out of work by the collapse of the construction industry, and la crisis has brought to a head many of the unspoken issues that the great British immigration – "colonisation", as some Spaniards see it – had left unspoken. Are the British there to stay or are they semi-detached? What la crisis has done is to force expats to decide: do we head home to grey, unwelcoming Britain or do we remain, either as an active, integrated part of Spanish life or as unwilling strangers, as aloof and distant as in the old days of empire?

Around half of Orihuela Costa's 30,000 inhabitants are British, far outnumbering other expats and the Spanish themselves, who make up only about 10% of the population. Many of the expats voted in the local elections in May for Claro (Cerca del Pueblo, Limpio, Activo, Reformista Orihuelo Costa), the party, formed in 2006, which Houliston represents. The key word there is limpio, the Spanish for "clean", which is understood by voters to mean that the party aimed to end the endemic bribery that has defaced Spanish politics on the coast and given such grief to unwary expats who bought illegally built homes. Figures from all the main parties have been involved, although it is the Partido Popular (PP), which this month takes over as the national government, that has harboured some of the most spectacularly corrupt operators, happy to take bribes to facilitate building on agricultural land or without proper planning permission.

"In the past, it hasn't suited the powers that be to have a big expat population on the coast actively engaged and voting," says Houliston. "It was easy for them to say: here's this big population who have come for the sun; well they've got the sun and that's all they need. There was a sense of injustice and a feeling that the only way to get things done was with a new party. The success of Claro was to create a political consensus on the coast. It was a big surprise to the PP when we won."

The intention, he said, was not to create a Little Britain party but one that reflected the local population, so there are Spanish and German members, and one of his coalition partners is a German Green; political meetings are held in three languages. For Houliston, his election and the increasing political involvement of Britons is a hopeful sign against a backdrop when traditionally expats did not bother involving themselves. "This is all part of Europe," he says. "For me, that's the fascinating thing. Think global, act local, as they say."

A couple of hours north in Xalon, there's a different tale to be told. While Houliston and others like him may be hoping to change the way expats relate to their lives in Spain, others are calling it a day and heading home. In Xalon, there's the familiar evidence of a sizeable expat population: a hairdressers called The Cuts, Harry Stafford's fish and chip shop and Bar 23 offering roast beef and Yorkshire pudding and a chance to hear "JJ Jones as Neil Diamond". This has been home to Claire Hibberd, who moved from Chesterfield in Derbyshire, but is in the process of packing up, the office of the real estate firm she ran now full of boxes and well-wishers popping in to say goodbye.

"I've had enough," she says. "I'm sick and tired." She is heading back in the wake of a "malicious and slanderous" campaign which has accused her of running a dodgy business and not paying her taxes. Crude anonymous leaflets about her have been stuffed in hundreds of local letter boxes. She is pretty sure who is behind it – another expat, "with balls of steel" – and she is in the process of making a denuncia (official complaint) about him to the local police, but her bags are packed. Such inter-expat feuds are not uncommon. She will miss Spain, which she made her home after her parents – her mother, Elaine, is a former town clerk of Belper – moved there. Her story – arriving full of enthusiasm but departing disillusioned – is not atypical.

"My parents wanted to live abroad," says Hibberd. "They had wanted to go to France, but the Spanish tend to accept you more. I've met some people here who've reinvented themselves on the plane on the way out – they've suddenly become builders or skilled technicians when they were bin-men back in England. Here, British people tend to stick with other British people and you end up in a clique – but that's the worst thing you can do. I have had people say that they meet hostility because they are English, but that tends to be people who don't integrate. And people don't realise that things are not cheaper here," she says. "Unless you're an alcoholic smoker," her partner, Darren, chips in with a smile. Among her clients are others who had hoped to make a go of it, she said, but have called in to say they can no longer pay the rent and are returning to England.

But if there are committed stayers and unhappy goers, there is a third category: those who would like to return to the UK but cannot do so.

Jo Hamilton, a local government worker from Manchester, bored by her job, decided in 2006 that she and her partner would "live the dream" in a place called Los Altos, not far from Orihuela Costa. Housing rip-offs, burglaries, unhelpful police, isolation, problems with other expats and the end of her relationship made it a hellish experience.

"Deep down I was becoming convinced that Spain was full of expats putting on a brave face and accepting the folly of their decision… with the usual British stiff upper lip," she writes in her cautionary tale, A Place in the Currant Bun. "There is no getting away from the fact that there are many unhappy people stuck in Spain who would love to go home but who are unable to owing to lack of available finances. There must be millions of euros tied up in unloved and unwanted Spanish properties."

Paul Rodwell, a tall, genial, multilingual young man, whose previous career was as a hotelier in Chile, Morocco and France ( you can imagine him effortlessly soothing newly arrived guests) is the British consul in Alicante, one of the world's busiest consulates. Almost a third of all Britons in Spain live in this region and last year the consulate dealt with 507 detentions (number one in the world) and helped 460 bereaved families (number two). He has noticed how the economic crisis has affected some expats.

"A lot of our people here are pensioners and they were faced, three or four years ago, with the fall in the value of the pound, so they saw the reduction of their pensions by 20 to 30%," says Rodwell, sitting in his office in a square of palm trees and coffee bars not too far from the seafront. The exact number of Britons in Spain is unclear since some people live only part of the year there and many full-timers have not registered with the padron – the municipal register which allows foreigners to vote and stand in local elections. Rodwell is quite evangelical about getting people on the padron, both as a way of them integrating better and to give the Spanish authorities a more accurate picture of how many there are.

"There is no statistical evidence of people returning home," says Rodwell, who has just been taking part in a Channel 4 documentary about life at the consulate, and could thus be a television star when it is broadcast in the spring. "There have been incidences of people handing over the keys to the house to the bank, which is often the worst thing you can do as they can come after you. Broadly speaking, the Brits are seen as a pretty good bunch, and they contribute a lot to the economy. The vast majority of them are enjoying life. People do really pursue the dream and it's admirable that they have that get up and go, but if they don't do their homework, it can be a nightmare. It's not easy at 40 or 50 to learn Spanish and it's even harder at 60 or 70."

One of his jobs is trying to help people who have been involved in housing scams or disasters, which are legion. "It has a big impact, a horrific situation for some people. There are heart attacks from the stress and we have had some people who are literally homeless." A third of the expat arrests he has to deal with are for domestic violence. "The incidence has increased, which could be a manifestation that people are under stress at home perhaps, with the money not coming in." Amazingly, around a third of those arrested assumed that they would be dealt with by British rather than Spanish law.

One of the problems, he says, is that some expats can drift into life in Spain without thinking too much about it. "People talk about 'emigrating' to Australia or Canada, but they sometimes don't see moving to Spain in quite the same way. They don't realise that they are cutting ties and they will have to deal with insurance and mortgages and money in a foreign language. They think it will all be eating al fresco and fresh fish, but that can wear off pretty quickly."

Spain is in the midst of its own economic catastrophe and its new government will soon be delivering harsh austerity measures to a country already with 20% unemployment. Whether Britons stay or go is the least of their concerns. But, for expats who came for the sun, those chill economic winds mean that the crunch has come. Those expats who are not checking out return flights tend to fall into two categories: those who have come as traditional migrants, young families seeking a different life and – the majority – those who retired to the sun. In the first category are Emma and Alan Lawton and their 13-year-old daughter, Molly, from St Helens, who are now in their sixth year in Spain. They have their own house in Javea and run a successful excavation and demolition business.

"This is home now," says Emma, sitting outside their home beside the swimming pool and the orange tree. "The quality of life is better. We are together more as a family and we have a wider variety of friends – Spanish, German, Swiss, all nationalities. We drink in local Spanish bars, although the first time we went in it was like a scene from a western – silence, everyone looking round. We were a bit of a novelty, trying to crack a market that was local. We got a frosty reception at first and we have had days when we thought about packing it in, but it's never been more than days and, to be honest, I've had more days like that in England. Here, it is more relaxed, it's no pasa nada [don't worry], but it's hard work and it's not all sunbathing and going out drinking."

She says that the expats who have problems were ones who make little effort. "If you go into a builder's merchants and the first thing you say is, 'Do you speak English?' then the barriers go up. Some people arrive with rose-tinted glasses and maybe not much Spanish apart from 'ola' and 'por favor'," says Emma, who also spoke no Spanish when she arrived but now takes part in a project called hablemos, run by the local town hall, to help people integrate better; groups of around 15 or 16 people, half Spanish-, half English-speaking meet weekly to talk in each other's languages.

Alan, who has just been accepted as a local volunteer bombero (firefighter), is also happy they made the jump. "I've never broken a mobile phone out here and in England it would be one a month thrown at the wall," he says, referring to how stressful he found life back home. "But the English have a bad name here. You get people who move out here and put their brains in storage at Alicante airport. They buy a Mercedes convertible and go out five or six nights a week, and a year later the bank has got their house and they've gone back to Britain. And we know of some people who've taken money for a job and then gone back to England without doing it. It's a totally different way of life from England – you don't look at the local news on TV and think, 'Flipping heck, we'd better put some extra locks on the doors.'"

So are they here for the long haul?

"Whether we stay for ever is a difficult question," says Emma. "If the economy improves we could be here for ever. What annoys me about the coverage of Spain in the British media – all those 'homes from hell' – is that it's not just in Spain people have these problems, it's happening everywhere."

While Emma and Alan represent the new wave of expat, George and Pauline Stevenson are part of the large number of retired Britons on the Costas. George was the Labour MP for Stoke-on-Trent until 2005 and previously the MEP for Staffordshire East. At their home in Benitachell, there is Antony Beevor's history of the Spanish civil war on the table and photos at hand of the Stevensons with Barbara Castle and Michael Foot. When George retired from politics, they decided that they wanted, in Pauline's words, "a new beginning" in Spain. "We didn't want to descend into our dotage," says George. "We wanted to go to a country we had never lived in. When we moved here in 2005, the exchange rate was €1.70 to the £1 and since then it's been down below €1.10. The first bombshell to hit the expats, many of whom depend on their pensions, was a damn near 30% reduction in the value of their pound. For people who arrived before that – they thought it would go on like that for ever."

"There are two kinds of expats," says Pauline, "and there is a very clear distinction between them: there are the retired ones – they'd been teachers or local government workers, doctors – and they had come intending to stay because they'd had holidays here and liked it. But they also keep a place in the UK so that they can use the health service – get their prescription pills and have their knee done. And there are the others. They come to work and they might have got a job and it went pear-shaped. They're like the birds in the summer – they fly off and then come back again. But I think the Spanish are wonderful. I shall die here."

There is no shortage, however, of the disgruntled Englishman abroad. The Daily Mail, that barometer of British peevishness, is the best-selling paper on the Spanish coast. Many of the seven expat English-language weekly newspapers carry regular baleful columns about the hellishness of life in "multicultural, politically correct, health-and-safety" Britain, complete with apocryphal stories of queue-jumping asylum-seekers, while simultaneously reminding readers of the many perils of being an expat. Some of the five expat radio stations carry the same gloomy conversations.

The Euro Weekly News's resident columnist, Leapy Lee, who had a hit record with "Little Arrows" in 1968 but whose career took a tumble after he was jailed over a fracas involving a bloody pub brawl in the company of the late Alan Lake, husband of Diana Dors, is one example. In October, Leapy, who lives in Mallorca, told his readers that the BNP is now "the only party spouting a bit of common sense". Not a few expats talk, completely without irony, of how Britain has been ruined by immigrants who don't bother to learn the language.

The Costa boom is over. The empty houses and urbanisations carry ever-reducing price-tags. For those expats battered by the economic storms when all they sought was a little quiet sun the choices are stark: stay and make the best of it – al-fresco eating and fresh fish included – or head home to an uncertain future in a land that now looks rather less kindly on new arrivals.