Property Boom Snowballs and Credit-Crunches -- Lessons to be Learned

International Bank HSBC has estimated that the global downturn has caused almost $53 billion worth of new developments to be put on hold on cancelled in Dubai. The bank says the biggest problem is the developments that are nearly completed that may leave developers going bankrupt. But I say the biggest problem is the developments most recently started.

The major developments where construction started despite the amount of major developments going up all around them; while there were already dozens of similar units on sale, and all in one of the smallest countries in the world.

This shows exactly why there has been such a problem in the first place -- too much speculation, building because times were good and people would buy, instead of building because there was a real demand for property.

The property boom was like a snowball, the more prices grew incredibly the more investors bought expecting them to just keep growing. Private investors were speculatively buying off-plan properties on little more than a whim and a promise of great profits by someone far from impartial.

The more the off-plan property boom grew, the more developers developed. Builders became property developers, so did anyone with a pot of cash that wanted to make it bigger, and even those with the means to get finance. Hotels that would normally have been hotels became apartment hotels and holiday resorts became resort-style developments, as everyone tried to get a piece of the action.

And this was going on all around the world; almost every country on the globe had its own boom fuelled by internal buyers, and overseas investors, some buying to sell as soon as they could turn a profit -- and who could blame them.

Not wanting to miss out, and not wanting to be the ones to stunt the growth which was fuelling their own profits, banks were giving out finance speculatively. Based on the properties growth, the profit they would be gaining if the buyer defaulted, and giving 100% finance to existing homeowners on off plan investment properties based on the rental income being able to pay for the finance.

Is it any wonder it all came crashing down? As rental incomes failed to be what they promised, obviously buyers wouldn't be able to pay the finance, the expected rental income was the only way many private investors could pay the mortgage, and they bought properties with that knowledge; swept up in the buy-to-let craze.

So now everybody has been burned. Banks are being much more frugal, and there just isn't the same number of buyers around, let along buyers that can secure finance. But we all just have to dust our selves off and start again.

already things are improving in the UK, with first-time buyers accounting for 22.5% of purchases in the first two weeks of 2009, more than double what they accounted for in the last months of 2008. The UK auction scene is currently seeing a new wave of investors, novices, buying at auction for the first time, and not for occupation, but for investment.

So on the cycle goes. I hope that there will be lessons learned and that the next property snowball will be kept under control so it doesn't knock us all on our ar**s.