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Investing in phased developments? Some points to consider.

Last time round, before or perhaps contributing to the crisis, developments were phased and the prices of the second phase were always higher than those of the first phase and so on for the third, etc. These showed the buyers how good an investment they were and how investing early was a good idea.

What they didn’t show was that resale values of similar properties in the general area were much lower than even the first phase price. When the investor in any of the phases wanted to sell onto the open market, they couldn’t even get their buying price back as they were so much above what other similar properties in the area were selling at. If their mortgage had come with the property, it would probably have been from the bank supporting the developer and the bank would have granted the mortgage based on the developer’s selling price.

Effects on the Market

The result is that the individual investor is stuck with a mortgage higher than he/she can sell the property for. When that starts becoming general knowledge, as it always will, investors whose property hasn’t been completed will look at their certain loss and future mortgage debt hung round their neck, and compare that to walking away and losing the 10% deposit they put down.

Once that starts happening, the whole pack of cards falls down, with the promoter being left with fewer properties sold and not enough income to complete the development and pay off the bank loan. Who’s going to buy into a half completed development? Because of that, resale prices drop even further. Thus matters get worse and worse with the bank eventually being hit by bad loans to individual buyers and a bad loan to the developer. And so the bank can’t repay it’s investors. Thus we have the property crisis.

How to prevent another crisis?

It could be prevented by buyers looking at the resale prices around and resisting the flash marketing of the new development. Then they would only pay the resale price for the new. That would make developments much less attractive to investors, so fewer would be built, and it would slow the market to the actual occupier pace and provide a much more financially secure world for us all.

Interested in more articles related to this topic? Why not read Home Building Boom On The Costa Del Sol, But Is It Sustainable?

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