Once described as “holding the key to London's future growth” by Ken Livingstone, East London is at risk of falling from grace. The promised Olympic revival is already suffering from funding problems, while the collapse of some of the world's biggest banks has left Canary Wharf and the Docklands, often described as “soulless” by nonresidents, feeling eerier than usual.

The Olympic village in Stratford Park, which post-2012 is destined to provide much-needed social housing, will now be a third smaller than originally planned - that is, if it does secure the £900million of funding still needed to complete the project. Farther south, in Docklands, sleek one and two-bedroom flats in high-rise blocks - built to house the cream of the world's financial talent - have fallen in value by about 20 per cent.

Investors may well wonder how it all came to this. Two years ago, developments including the Elektron Building, in Blackwall Way, and Ballymore's awesome Ontario Tower, in New Providence Wharf, also in E14, set the pulses of buy-to-let landlords racing. Now, some investors who borrowed heavily to buy flats in such developments are in trouble. Many have tried to sell and failed. There are fears that some who bought off-plan but have not yet completed may have to back out because they can no longer obtain a mortgage.

“East London has a very big buy-to-let market, and it is the buy-to-let mortgage market that has suffered most,” says Richard Everitt, director of the estate agent Winkworths. “There is still demand from tenants, but mortgage costs from rates and fees are threatening income from rent.”

Krishnan Marwaha, 34, a landlord who owns a portfolio of investments in Docklands, says: “It's been tough for landlords. Especially the amateur ones who bought with big loans from top-end developers at top-end prices. They made the mistake of over-committing, thinking that just because it is Canary Wharf, it was a good investment.”

Stable demand from tenants might have kept landlords' heads above water, but if the unemployment count worsens as predicted, that could change. The Centre for Economics and Business Research (CEBR) has upped its forecast for financial sector job losses from 20,000 to 62,000 workers by the end of 2009 - many of whom are likely to work in Canary Wharf.

Still, compared to past setbacks in the 20-year history of the redeveloped Docklands, its recent problems seem relatively minor. “For the first few years it stood virtually empty,” says Mike Bickerton, associate director of the property company DTZ Residential. When the Canary Wharf project was conceived in the 1980s, the area was a wasteland. “The area was very run-down and there was no public transport,” says Jonathan Woodfield, of the estate agent Hurford Salvi Carr.

The Docklands now benefits from the Docklands Light Railway (DLR), running from Bank to Stratford, Beckton and Lewisham. New DLR stations are scheduled to open at Woolwich in 2009, Stratford International in 2010 and Dagenham Dock in 2017. The Jubilee Line, running from Stanmore via Green Park to Stratford, makes the journey to Canary Wharf meetings so much easier for Mayfair's hedge fund managers.

“Now that the transport links are in place, the viability of the area as a counterpoint to the old City of London has been proven,” Bickerton says. Office rents are still about 20 per cent lower here than in the City, and the recent downturn has not displaced Bank of America, Barclays, Citigroup, HSBC Holdings, FTSE International or Reuters from Canary Wharf. Sarah Heard, head of new homes at the estate agent Savills, says: “Demand for new homes will depend on occupancy of commercial buildings.”

Agents predict that companies that do depart could soon be replaced by other firms, including KPMG, the credit rating company Fitch Ratings and the fund manager State Street.Nomura, the Japanese bank, could relocate its 1,600 workforce from the City to Canary Wharf after its purchase of Lehman Brothers' European investment banking operations.

The quality of residential developments on offer should also keep demand high, Heard says. “Pan Peninsula, which has fantastic facilities, has sold out. The building has a 20,000 sq ft gym and bar area, a cocktail bar on the 50th floor and a private cinema.”

The dearth of buy-to-let deals has meant that demand from owner-occupiers is replacing demand from landlords, says Piers Clanford, managing director of Berkeley Homes (South East London). “Recently we have sold more to owner-occupiers - and have seen an increase in inquiries. There are still a lot of overseas buyers looking for a pied-à-terre in London, as well as Asian buyers looking for properties for their student children.” Studio flats at Berkeley Homes' Caspian Wharf development in Bow, East London, are selling for £205,000. A two-bed flat at Omega Works, next to the Olympic site, costs £300,000. “Bow is still good value and there is massive potential for uplift,” Clanford says. “It has strong foundations, a lively community and strong transport links. It will get better and better the closer we get to 2012.”

East London has already experienced a pre-Olympic boom, with average price rises of 26 per cent since July 2005. Woodfield says that the “Olympic effect” will give the market further impetus. “We will see that in late 2010 and early 2011,” he says.

Plenty of buyers clearly agree. Apartments in developments such as Lovell's Heart of Bow, on the junction of Tredegar Road and Parnell Road, have all been sold with the exception of three penthouses. According to Marhawa, East London is still a good investment - if you have the capital. “Now is a great time to buy because of the big discounts on offer. Rental yields look good at around 7 per cent and prices will come good again, once we are through this correction.”

Case study

Justyn O'Shaughnessy, a 36-year-old property-finder, bought two new apartments in East London by Telford Homes. He paid £180,000 for a studio flat at One Stratford, which he bought off-plan in 2006, and £205,000 for a two-bedroom penthouse at Cubix Apartments in Bow, which he bought off-plan in 2004.

The proximity to the City and Canary Wharf was a major factor in his decision to invest there, but he also believes that the 2012 Olympics will have a big impact. “The regeneration in preparing for the Olympics is a huge bonus - it will help towards balancing the wealth from other parts of the capital,” he says. “East London is still an affordable location and offers great opportunities for sharp entrepreneurs.”

Although many property professionals bemoan the current state of the property market, he believes that this is a good time to buy. “It's good to finally see a market in favour of the buyer,” he says. “I would encourage buyers to go forth and negotiate. The tipping point will be when it's cheaper to buy than to rent - at the moment it's cheaper to rent than to buy, but I believe that the market can rebound just as fast as it has dropped.”

www.telfordhomes.plc.uk, 0870 8720987

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