It may be difficult to believe but speculators are shrugging off the bleak outlook for the housing market by continuing to invest in new-build developments in the hope of turning a quick profit. Many of them are lured by stories of the substantial gains made at the height of the boom. But today, despite falling house prices and warnings about the growing risks of buying off-plan, investors are still buying flats and houses with the aim of “flipping” them on to another investor before the building is complete.

Some new developments, particularly those in the London Docklands, are still changing hands faster than they are being built. But as the property market turns, buyers disappear and house prices slide in many areas, are these profit-hunters risking too much too late?

Amid the slowdown, it is in estate agents' interests to drive the market in flipping. Jaimie Beers, an agent at the new homes division of Franklyn James in Canary Wharf, which specialises in trading off-plan properties, says: “Flipping used to be a very specialist thing; only big players would do it. But I've flipped property for all types of people from nurses to people working in Canary Wharf who see the new developments go up every day.”

According to Beers, the surge in flipping is being fuelled by a lack of property for sale. “There was very little completed stock for sale last year and investors were finding it hard to find finished properties that would give them decent returns, so they went for off-plans instead.”

Some of these investors would have bought with the specific aim of flipping and thus avoiding stamp duty and the need to take out a mortgage. Others may have originally bought to let but ended up selling early, with the capital gains too hard to resist. In one of Beers' most recent deals, one investor made a profit of £60,000 in less than 18 months. He sold a two-bedroom flat at The Icon development in Canary Wharf for £545,000, having bought the property from another investor for £485,000 less than two years before. “Some of the flats at The Icon building have turned hands at least three times. Some even more. The building will not be finished until mid-2009,” says Beers.

Other developments in the area, where flats change hands frequently, include Pan Peninsula and Lanterns Court. But examples of off-plan property trading can be found wherever there is a big development with hundreds of flats. Often it is the agents acting for the developers who prompt investors to flip. Annabel Braithwaite, a 34-year-old PA in London, is typical of the investors who made easy money while the market was strong. She had intended to keep the one-bedroom flat she bought off-plan at the Vision7 development in Islington in 2004 for £184,000, but a call from Hamptons International prompted her to sell for £220,000, 14 months after her purchase. “I'm really glad they called,” she says. “It turned out to be a really good investment.”

In a rising market the benefits of flipping are enticing. But is it worth the risk now? Optimists insist opportunities still abound, but the stakes are undisputedly higher. Those who buy to flip risk ending up saddled with debt on a property they cannot sell. In the slowdown, the new-build market is taking the hardest hit. The price of new-build homes, usually sold at a premium, is dropping faster than second-hand property. Data from Smartnewhomes, the internet site, shows that the asking price of a new-build home is now 0.6 per cent less than it was this time last year.

Many of those defaulting on their mortgages are investors who bought properties they failed to sell on and could not let successfully. The problem is more visible in the big cities in the North of England, where “flipping” peaked about three years ago as new-build flats sprang up in all directions. London, however, is not immune. Although the market in the capital has been more resilient, not all investments guarantee success. Cory Askew, an estate agent at the Docklands branch of Chesterton, says that 25 per cent of his fees last year were generated by the sale of repossessed properties, most of which came from failed landlords.

The Association of Residential Letting Agents (ARLA) has been warning investors against buying off-plan for several years. Malcolm Harrison of ARLA says: “Buying with the intention of flipping and regarding the tenant merely as a back-up option lulls investors into a false sense of security. There are too many similar properties on the market.”

Come summer, there will be even more. According to Peter Murray, partner at King Sturge estate agents, the crunch point for the London new-build market will come later this year, when a number of large new developments, now going through the planning stages, are put up for sale.

“Planning restrictions mean that there is still an undersupply of property in London. There have been no launches of big schemes so far this year. The market has yet to be tested,” he says. “But later this year we will really know whether investors are buying to trade or buying to keep.” We will also find out whether they are still buying at all.

FACT BOX

A large number of repossessed homes are new-build properties bought by investors, so be aware of the pitfalls:

Buying a property off-plan with the intention of selling it at a profit before completion relies on property prices rising. If prices fall and you cannot sell, you could end up with a property worth less than you paid for it and debt that you cannot handle.

You may not be able to let the property; even if you do, you may not be able to charge the rent that you need to cover your mortgage.

The boom in flat-building has led to an oversupply of flats in cities, most notably Leeds. It is more difficult to sell or let a flat where there are many similar properties on the market.

Large schemes with lots of small flats, where the developer is asking for a deposit of just 10 per cent, are more likely to attract speculators than those that ask for higher deposits.

Many developers dislike flipping because it makes the prices of their homes more volatile. Some are making new-build contracts “non-assignable” to stop investors selling before completion.

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