New-build flats sold four years ago at £180,000 are now fetching just £130,000. Miles Brignall reports from Manchester, on the frontline of the housing slowdown

The spectre of negative equity that blighted so many households in the 90s is back with a vengeance.

Prices for new-build flats are in freefall, with some buyers who paid top-of-the-market prices as recently as 2005 now seeing the values of their homes down 40%.

We focused on Manchester and found flats selling for £50,000 less than the owner paid for them. Repossessed flats are being dumped on the market for prices that would have seemed unimaginable a few years ago. Meanwhile buyers are reluctant to enter the market in case they end up over-paying.

We highlight block after block of new-builds where prices are tumbling:

· A one-bed flat sold by a developer for £140,000 in 2001 fetched just £87,970

· A two-bed flat selling for £180,000 in 2005 struggles to get £128,000

· Estate agents windows marked up with "price corrections", and one saying: "Make me an offer - I may say yes."

In recent years Manchester has enjoyed an economic renaissance. Developments such as Salford Quays hope to cash in on the arrival of thousands of BBC employees relocated from London. But the signs of over-supply elsewhere are evident; rents are falling, and the buy-to-let investors who drove up prices are now fast evaporating.

It's not just new-builds in Manchester that are suffering. The pattern is being repeated in cities across Britain, where "luxury city centre apartments" are witnessing big price falls. One agent in Nottingham warned potential investors that even at this level they may fail to find tenants to support buy-to-let mortgages. There is a "buyers' strike", in which people are unwilling to purchase until the floor in prices is found.

The global credit crunch is compounding the problem, with mortgages becoming tougher to obtain. This week Bradford & Bingley revealed that its profits had halved. Advantage Home Loans (one of four providers that had signed up to the government's HomeBuy scheme) was closed down by its owner, Morgan Stanley.

However, it's not all bad news: first time buyers are seeing previously unaffordable homes fall back into reach.

"There are so many flats on the market, buyers haven't got the time to get round them all. One couple said to me they had so many flats to choose from they couldn't make a decision," one agent said. Another agreed that first-time buyers would be the big winners. "For them, the fall in prices is great news but you have to feel for the people who are in negative equity. You can expect to see a lot more repossessions over the coming months," another agent said.

The losers are likely to be the late-comers to buy-to-let. When Guardian Money spoke to the residents of new-build apartment blocks in Manchester, we found that virtually all were occupied by tenants whose landlord was a buy-to-let investor.

Early investors are still sitting on large gains. But more recent entrants have been burnt by price falls, and those who have been unable to find tenants are now facing repossession.

We highlight the story of Tamsin Barks, a Sussex vet who was persuaded by a property seminar company that she could make a fortune by investing in new-builds. She bought seven properties, including one in Manchester, but estimates her total losses after costs at £350,000.

Brokers specialising in buy-to-let say talk of a crisis is misleading as it is based purely on the new-builds in city centres.