Affordable mortgages are the key drivers of any property market. The current credit crunch has showed this fact clearly, especially in Western European markets, like Spain and the UK, where tightening lending criteria, combined with some over-supply (in Spain's case) has caused price drops.

Statistics and trends in the mortgage lending sector can tell us a lot about the property market; and Poland is quite a different story from the UK, for example.

Developers' bonanza has ended

The first phase of strong property price growth in major Polish cities and the developers' bonanza that went with it has ended. Local affordability has reached a ceiling due to the sharp increase in prices and the rising cost of borrowing.

The first wave of people trading panelaks and buying new flats by taking on small debt has also ended. Many potential buyers have started to be more aware of the risks of taking on large debt by buying apartments in a hurry.

At the same time, the supply-demand balance of new apartments has started to change in the main cities, and there was no need to buy in a rush in order to get the best unit and price.

As a result, price growth has slowed down from the beginning of 2007 and since the second half of the year, the market has stagnated.

Additionally, the Polish media, looking for sensational stories, have increasingly started to publish articles about the house price crash in the USA and the possibility of one happening in Poland.

Expectations from potential buyers were that property prices will fall. We have had a 'holding phase' - developers waiting for demand to pick up and not reducing prices, buyers waiting for price reductions before go shopping again.

In time, when sellers who couldn't sell responded to the changing situation and reduced prices, but only for panelaks or overvalued new projects in bad locations.

How was the mortgage market then?

I talked to several mortgage brokers in Poland and they all said that after a busy 2006 and beginning of 2007, most of 2007 was dreadful in terms of sales of mortgages.

However, at the same time, Polish mortgage debt was rising and in 2007 it grew by 50% year-on-year. Why? Many mortgages signed in 2006 were drawn down in 2007 and those buyers, who bought and paid the deposit in 2006, were applying for mortgages in 2007.

Mortgage lending has picked up only in the second quarter of 2008.

Sale of mortgages on the rise

Two thirds of all banks in Poland offering mortgages noticed increased demand for housing loans in the second quarter of 2008. The results are confirmed by brokers and the volume of mortgages issued in the first half of 2008.

As we can see on the bars below, four out of five major mortgage lenders in Poland have noticed growth in the sale of mortgages in the first half of 2008.

Such results were achieved by banks despite strong expectations that lending would slow because of increasing interest rates and banks' higher margins. But not all banks could afford to increase their margins due to strong pressure from competitors.

A report issued by the Central Bank of Poland on all loans issued by Polish banks in the second quarter 2008, underlines that behind the growth in mortgages we have increases in household income, a desire to buy after the long period of waiting for price reductions and still fairly low interest rates for mortgages in Swiss francs.

There are no official statistics on what type of mortgage products were in the highest demand and what type of properties were financed.

According to mortgage brokers and bankers, an increasing number of clients are interested in re-financing; but also, what is even more important, more clients are buying on the secondary market.

Breaking point?

That seems to be logical given some price reductions that have occurred on the re-sale market and the affordability issues that still exist (Polish banks will lend in foreign currency, only if a client can afford the same mortgage but in Polish zloty).

Second-hand properties are generally less expensive than off-plan. New apartments offered by desperate-to-sell speculators who bought 12-24 months ago by paying the deposit only are generally sold for less than those offered by developers.

Developers, on the other hand still find it difficult to find buyers if they do not wish to reduce prices. It looks like the local buyers are not satisfied with indirect price reductions - free parking place or white finish, for example - and prefer simple price discounts.

Some developers who have unsold apartments may now find themselves under a great deal of pressure, especially if a development was fully financed by a bank. The anecdotal evidence is that many are willing to negotiate on price, but don't want to admit officially the price per sq m is lower.

So far, I've heard only about single cases when developers officially lowered the price per sqm.

It is worth remembering that primary and secondary property markets are strongly dependent on each other in Poland. Those who sell second-hand property usually opt for a new flat. More activity on the re-sale market means, as a rule, more sales on the primary market.

That is possible in the second half of 2008 and could translate into a slow pick-up of the market.

However, given the large supply of new apartments in main Polish cities, we probably won't see any real price growth in main cities for between 6 and12 months.

After that, the Polish market is starting to look much more interesting and quite possibly poised for strong second wave growth.