Matthew Day in Warsaw -

All good things, as the saying goes, come to end - and now this timeworn adage can be applied to Polish residential property prices. After years of soaring growth that saw house prices skyrocket, the market has begun to cool, with the rise in prices slowly petering out or, in some cases, even reversing.

Recent research by the property consultancy agency Rednet reveals that average prices in Katowice, Lodz and Wroclaw - cities that had been enjoying an unprecedented property boom - fell in March, confirming the slowing trend that has gripped the market for most of the year. At the same time, prices in Warsaw and Poznan rose by a mere 0.41% and 0.89% respectively. At best, experts predict, prices will rise across the board by 10% in 2008.

All this is very different from the glory years that followed Poland's EU accession in 2004. Propelled by a confident economy and surging demand for housing from a generation of young Poles eager to escape the claustrophobic communist-era properties that hallmarked their parents' generation, house prices began climbing. According to Tom Leach of the Krakow-based property consultancy Leach and Lang, in June 2006 the square-metre price in an average suburban development in Krakow came in at about €1,755. By the end of the year, that price had shot up to €2,925. In Poznan, between January and May last year, prices increased by 10% to 12% a month, while Katowice saw the value of residential property rise by 40% in just seven months.

The massive price increases led to a building boom as developers – both Polish and international – scrambled to get housing built. But as is so often the case, the rush to increase supply has now helped cool the market. Maciej Dymbowski, Rednet's managing director, says that in 2006 building permits were issued for about 170,000 residential units, but in 2007 that number rose to 240,000.

Money's too tight to mention

The increase in supply coincided with Poles finding it hard to get the money to buy property. Dymbowski points out that interest rates, which were 4% a year ago, have now hit 6%, and may well continue to rise as Poland's central bank tries to reign in rising inflation, which now stands at 4.1%.

In addition to this, the huge increases in house prices mean that Poles now struggle to afford the home of their dreams. And to make matters worse for somebody trying to get on the property ladder, banks have started to cut back on their once-generous mortgage offers. In part, the banks' shift towards financial prudence stems from the general effects of the global credit crunch, but it's also due to a change from the market-share grabbing policy that characterised the mortgage sector over the past two years, to one of consolidation. Having won their markets, banks now want to make money from them.

The changes in the residential market could spell bad news to some. Leach says that, "anyone who bought at market prices in the last year may have lost money and some people may also regret not having sold at the top of the market." He highlights the case of one buyer who bought an apartment in Krakow in May last year for €5,859 a square metre, but sold it this year for just €4,101.

Dymbowski also says that large investors who bought land at the top of the residential boom may now "have problems," but adds that this situation should only be temporary, as the market should bounce back owing to strong fundamentals. "You have to remember that the EU average is 500 flats per 1,000 people, in Warsaw it's 450, in other Polish big cities it's around 380 to 390 - and it's a big difference," he says. "There is still a shortage of 1.5m flats in Poland, and you have to remember that salaries in Poland are increasing. So investors will still enter the market, and it continues to be a good market."

Leach also points to the positive, adding that a year of stability on the housing market could have beneficial effects in the long run. "Although it seems like rather doom and gloom at the moment, 2009 and afterwards will see a second cycle of more steady growth for Polish residential prices," he explains. "Having a 'quiet year' in 2008 will be good for the industry, as property prices will again become affordable for the local market – and from then on growth of 15% per year, mirroring salary growth, is entirely feasible and probable."

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