By Robert Anderson
At the peak of Latvia's housing boom in 2006 speculators were slapping deposits down on 10 off-plan Riga apartments and doubling their money by selling them before they had even been built.
Now prices in Riga and Tallinn are sliding and Vilnius's property market is topping out, leaving late investors with burnt fingers and raising fears that the housing slump could trigger a wider economic "hard landing".
The property markets of the Baltic states, like their economies, have boomed so spectacularly because they are tiny and there was so much pent up demand to move out of grim communist-era tower blocks. Easy credit from banks fighting for market share, as well as rapidly rising wages - up by more than 30 per cent last year in Latvia - merely lit the touch paper.
As always, Tallinn in Estonia - the smallest and most picturesque of the three Baltic capitals - led the way. A typical price for a renovated apartment in Tallinn's medieval old town is now about €5,000 per sq m.
Riga, the largest and busiest capital, grew the quickest. Most of its Jugendstil (Art Nouveau) mansion blocks have been restored to their former glory and annual house price inflation in the third quarter of 2006 was the fastest in Europe at 57 per cent, according to Knight Frank.
Vilnius, with its rambling Gothic, Baroque and Renaissance old town, is bringing up the rear in the property cycle just as Lithuania is in the economic cycle. Prices there still rose 17 per cent last year, according to Ober-Haus, the Baltic real estate agency, but the bulk of this was in the first half.
Unlike, for example, on the Bulgarian coast, most of the buyers were locals but foreigners gatecrashed the party, drawn by the beauty of the Baltic capitals - which many discovered from budget airline flights - as well as the easy lessons learned from the earlier price spikes in Prague and Budapest.
British and Irish investors typically chose off-plan apartments just outside the centre where deposits could be as low as 10 per cent, producing healthy yields on buy-to-let investments. By contrast, Scandinavians from across the Baltic sought cheap holiday homes, while Russians targeted Jurmala, the old Soviet holiday resort on the Latvian coast.
Today new foreign buyers have almost disappeared and existing investors are hunkering down for the long term after prices slumped by up to 20 per cent in Riga and 10 per cent in Tallinn in the second half.
Property prices had simply risen too fast to be affordable but also banks tightened their credit policies as the Baltic bubble drew unfavourable international attention - and that was even before the global credit crunch began last summer.
The fall started in the secondary market, particularly for Soviet-era apartments, but has now spread to newly-built properties, where developers have to offer extras and some are beginning to slash prices. Ober-Haus says 1,000 of the 3,500 units built in Tallinn last year are still unsold.
Most real estate agents predict that Tallinn and Riga will tread water this year, while Vilnius's rise will come to an end. The big worry is that the decline in the property market could trigger a sharp decline in economic growth or even a recession.
Plunging property prices are certainly deflating the much-hyped Baltic miracle but they are not yet triggering panic selling or a wave of credit defaults. Balts are not suffering from negative equity because prices have risen so much over the past few years and they were given their old Soviet-era apartments for free.
Their credit binge may have left them more indebted than their central European neighbours but, by western standards, they are far from profligate.
Foreigners are also taking things in their stride, though many must now be revising their expectations about when they can realise the value of their investments. Kalinga Mantotta, a 30-year-old British investor, bought a 70 sq m off-plan flat outside Tallinn in 2005 through UK agency Property in Estonia in order to make enough money to repay his UK mortgage. He remains unfazed by the recent price slide. "It will take one hell of a crash to take prices back to what I paid," he says.
Foreign buyers can also take comfort from the silver lining that net yields have gone up (and are now more likely to cover their interest costs) as rents are rising because more locals are choosing to rent rather than buy.
The decline in construction of new developments also makes it likely that there will be a supply shortfall when demand invariably recovers in a year or two. "The days of 20 per cent to 30 per cent capital appreciation rates are behind us but good double-digit rates are still a possibility - but not this year," says Charles Rodger of UK agency Arc Property.