The global credit crunch has its roots in areas like Florida where homebuyers gambled on rising prices with money they did not have, writes Eoin Callan

The seizure that gripped European financial markets yesterday can be partly traced to an unlikely place. Like the proverbial butterfly that flaps its wings and sets off a tidal wave on the other side of the world, Sarasota, Florida is at the centre of the US housing bust that sent shock waves through global markets.

The Gulf coast community seems an improbable setting for a financial crisis. Pristine yachts bob lazily off an eight-mile barrier island as bronzed children play close to sea turtles in the sugary white sand.

The shoreline is dotted with a blend of exclusive beachfront residences and family-friendly condominiums that give it an all-American appeal and have attracted well-known homebuyers such as Stephen King, the author.

But along with bubble property markets across America, west Florida has seen its luxury lifestyle shaken. The Sarasota district has experienced the biggest drop in house prices in the country, with foreclosures spiking after a drop of almost 15 per cent in the year to March.

Florida is the "canary in the cage", according to Jan Hatzius, chief economist at Goldman Sachs.

The precedent has alarmed Wall Street economists tracking the worst US housing slump in 16 years, as price falls in Sarasota have spread across the state and threaten to drag Florida into recession.

But what caused the west Florida housing bubble to inflate and then suddenly pop?

It is tempting to point the finger at the rise in popularity of high-risk adjustable loans that were backed by complex new credit securities, which are now in distress, and in some cases regarded by traders as worthless.

These innovative financial instruments played a role. But the accounts of residents, real estate agents and mortgage brokers in Sarasota point to a more familiar culprit: simple, old-fashioned greed.

"People were buying places figuring they would put in a new kitchen and then flip them. It was greed. We were all in the same game. We were selling a piece of paradise," says Christina Neff, a real estate agent with Michael Saunders in Siesta Key. "Flippers are behind what is happening."

Michael, a stockbroker from New York who sold his condominium on Siesta Key during the boom, said buyers who had no intention of carrying a mortgage for the long term, joined bidding wars that pushed up his sale price.

Dorothea Sandland, a real estate agent with Remax, says: "A lot of buyers took out second mortgages, risky loans or even special bonds because they thought they could get rid of the property very quickly."

Short-term speculative investments drove prices to unaffordable levels and it was this that eventually caught up with buyers.

Speculative buying is not always easily discernible in publicly available housing data, but the accounts of local market participants are backed up by research showing Florida homes became increasingly unaffordable in the past two years.

Loan payments on a median-priced home in the state reached more than 30 per cent of median state income last year compared with an average of 18 per cent in 2003, and a national rate of 23 per cent, according to Goldman Sachs.

This risk-taking by homebuyers willing to bet money they did not have that prices would keep rising has been a key cause of the global credit crunch that is now under way. When house prices peaked and then faltered, many buyers were unable to sustain their mortgages. They are now being pushed towards foreclosure, hastened by higher borrowing rates as once-popular subprime loans are reset. "I'm looking at condos coming to market that were bought for $259,000 (€215,000) when there are brand new ones next door selling for $180,000," says Sandland.

Claude, one of many so-called Canadian "snowbirds" who winter in Florida, said he had a good credit rating but opted for a subprime loan because the low initial rate made a short-term investment more profitable.

He says he is now "trapped" with an unaffordable mortgage and a depreciating beachfront property. With homeowners such as Claude dotted throughout the country and the outlook for the US housing market darkening, spooked bond investors have been fleeing the $8,500 billion mortgage market and shunning assets vulnerable to knock-on effects.

But Joe Hembree, president of the Sarasota Realtors Association, says the local market will recover as flippers cut their losses. "There are great bargains to be had throughout the community as asking prices have dropped," he says.

Already, speculative investors are returning to the market and can be found scouting foreclosed properties, confident a new generation of sun-seekers will be lured by the promise of paradise.