After all the gloom, at last there's some good news on house prices...

Negative equity is poised to claim one of its most famous victims yet. In Connaught Square, the Georgian residency of Tony and Cherie Blair, house prices are falling faster than a rat down a Grade II-listed drainpipe.

Estate agents say that the Blairs – who are believed to have mortgaged themselves to the hilt to acquire their five-bedroom Bayswater home – would be lucky to get the £3.65m they paid for No 29 in 2004 were they to sell the property now.

A smaller three-bedroom home on the north-east corner of the square has just had its asking price slashed by nearly £500,000 after more than four months sitting in a stagnant market.

The value of the Blairs' other Bayswater property in Archery Mews, a house adjoining their Connaught Square home, may have already fallen below the £800,000 they paid for it last year. Adrian Mason, sales manager of the Mayfair office of Jackson-Stops & Staff, who have cut the price of the Connaught Square three-bed property from an initial value of £2.6m, says these are difficult times for the square: "It [the reduced property] has been on the market for more than four months and we have had to reduce it a second time to £2.15m. It is being offered as vacant possession and we have had some interest from [residents] within the square. But if we can't get more than £2m then the owners have asked us to take it off the market and offer it as a rental."

That all raises some rather interesting questions about the wisdom of the Blairs' investment.

Even in 2004, the £3.65m price tag was greeted with a sharp intake of breath from some of the local estate agents who regard Connaught Square as desirable but not quite at the top end of the market. "Five- bedroom properties, like the very best in Connaught Square, are always going to have a ceiling and I think that the Blairs have reached it," said one Bayswater agent. In her memoirs, Cherie Blair describes the mortgage the couple took out as being "the size of Mount Snowdon". Back then, under the guiding eye of the Blairs' American business guru, Martha Greene, they spent hundreds of thousands of pounds on the property. Rising costs meant they had to take in tenants to help meet what were thought to be monthly repayments of £12,000 on a buy-to-let mortgage.

"Yes, that was very scary. Particularly since I was the person who had to support it," says Mrs Blair of that period, alluding to her role as the main earner of the pair thanks to income earned as a leading human rights QC. "Because whatever else happened, we had to meet the monthly payment and it was down to me. Because no one else was going to meet it, were they?"

But there will be little sympathy for the Blairs should they lose the benefit of any equity in their west London house. As negative equity starts to bite, plenty of people have already lost their homes.

There is no sign that the Blairs will suffer such a fate. If anything, the couple are more likely to add to a portfolio of seven properties.

Since Connaught Square they have made two more purchases: a £4m mansion in Buckinghamshire which belonged to the actor Sir John Gielgud and a two-bedroom flat in Islington believed to be for the use of their eldest son Euan.

Melanie Bien, a director at Savills Private Finance, a mortgage broker, believes those who overstretch themselves could be at risk. "If the Blairs want to sell, and the property value has fallen, they may have to make up the difference themselves," she said. "But if they stay put they will face the problem of remortgaging. Most mortgages will be on a two-year fixed deal, so the Blairs maybe coming up to a second remortgaging."

Ms Bien added: "Since 2004, rates have gone up and the most competitive rates are for those with at least 25 per cent equity. I'm sure specialist underwriting has been arranged to allow for the Blairs' good earning potential."

Down: Wooton Underwood

A Grade II-listed country home in Buckinghamshire that was once home to John Gielgud. Bought for £4m.

Ailing: Bristol

Two flats bought in 2002 for Euan who was at university there. A fraudster helped in their purchase.

Up & Up: Trimdon Colliery

Blair's former constituency home in Co Durham cost £30,000 in 1983. It's now worth 10 times that.

Down: Connaught Square

The west London home was purchased in 2004 for £3.65m. The family added a mews extension to the property for Mr Blair to use as an office. The house has no garden.

The slump: winners and losers

The sharpest price falls have been among flats, semi-detached and detached homes, while bungalows and terraced houses are proving more resilient. Values in the prime country house market have fallen by less than 1 per cent.

The buy-to-let sector is now especially vulnerable to a downturn, as the 50 per cent increase in buy-to-let mortgage arrears at the beleaguered Bradford and Bingley suggests.

At greatest risk, according to estate agents, are homes where there is a whiff of speculative development, such as studio flats or conversions over shops.

Morgan Stanley claims that if house prices fall by 25 per cent over the next two years, a quarter of all borrowers will be in negative equity.

Negative equity "danger zones" include parts of Glasgow, south-east London and Manchester, according to credit reference agency Experian.