Tallinn strong rise in house prices in the past decade is over !

Robert Anderson

Like revellers plotting stag weekends abroad, buy-to-let investors are always looking for the "new Prague" - the latest, hottest destination in central and eastern Europe.

Tallinn, the Estonian capital, has become a magnet for both those seeking one last wild weekend before they are married and those eager to speculate on up-and-coming property markets. Cheap Easyjet flights from London are whisking both types of visitors to the Baltic coast.

Unfortunately, the party may have already moved on, and Tallinn has been left with a hangover. Property prices have risen by 10 per cent to 15 per cent a year for the past eight years, according to UK agency Property in Estonia, with growth peaking about the time of European accession in 2004. But the market is predicted to stay flat or even fall this year.

Apartments in Tallinn's medieval old town already start at €5,000 a square metre, above what you would have to pay in Prague's, much larger, historic central district.

Fears that Tallinn prices have converged too fast with European Union levels - propelled by over-eager local and foreign buyers and fiercely competitive banks - coincide with more general concerns over the overheating Baltic economies and the global credit crunch.

The Estonian economy grew 11.4 per cent last year and the finance ministry predicts 8.1 per cent growth this year. But with interest rates creeping upwards and banks tightening lending conditions, some analysts warn of a sharper decline in growth, triggered by a loss of confidence in the property market.

"Given the large imbalances in the Baltic economies we think the downturn could be quite severe and long-lasting," said Danske Bank in August.

Figures are hard to come by, but most agencies agree property prices have fallen this year by 5 to 10 per cent, with the steepest falls in the old town and the crumbling Soviet-era tower blocks in the suburbs.

"We tend to steer clear of Tallinn right now," says Charlie Pritchard of UK-based Churchill Solutions. "That's where the biggest boom was and the market is now turning."

Other agencies are more sanguine. Baltic agency Ober-Haus agrees that the overall market may stagnate this year but, for the off-plan new developments that foreigners typically buy, it believes prices should still rise by 5 to 10 per cent.

Foreign demand has sagged slightly but British and Irish buy-to-let speculators are still coming and Scandinavian buyers from across the Baltic Sea remain keen on the city as a cheap holiday home location.

Most foreigners are interested in developments just outside the city centre, which start at €2,000 a square metre, although they represent only 10 per cent of buyers there. Suburban houses are more popular with local families but they are too large to offer good yields and too difficult to sell if there were to be a prolonged market downturn.

Meanwhile, the old town, where foreigners make up half the buyers, is now simply too expensive. "People are just not willing to pay those prices," says Charles Rodger, of UK-based Arc Property.

British investors are typically reinvesting equity from their rapidly appreciating properties at home, but there are also some who have no property at all.

"We have quite a lot of young clients who can't afford to get on the UK property ladder but who can afford to put up a deposit here," says Mr Rodger.