Lithuania and Latvia topped the Knight Frank 2007 forecast for capital growth in residential property markets across Europe, while Estonia's performance was also forecast as 'excellent'. According to Knight Frank, those who bought Lithuanian property in 2006 could expect a 20 per cent rise in the value of their investment over the course of a year, while Latvian investors were looking at a value increase of approximately 17.5 per cent. The Estonian market was forecast as more stable but less explosive, with an annual return of around 12.5 per cent.

As we approach the end of 2007, however, some experts are questioning the further investment potential of the Baltic property markets. Danske Bank has criticised the Baltic governments for failing to deal with a number of macroeconomic imbalances, and warned that property prices in the states may soon begin to decline as a result. The Bank of Latvia has also admitted that the country's economy is overheating, after growing at an annual rate of 11.3 per cent in the second quarter of 2007. So, has the investment potential of Baltic property peaked? "The investment potential of Baltic property has peaked over the last couple of years, after the country joined the EU in 2004," says Charlotte Williams of Someplace Else. "But the prices of new developments continue to grow because of high demand, growing wages and living standards."

As Darren Goodson, author of How to Benefit from one of the Biggest Property Booms in Eastern Europe, points out, the Estonian market has emerged as the most stable of the Baltic states. "The Estonian property market has stabilised from the massive growth over the last few years," he says. "I foresee property prices increasing by a modest 10 per cent per year for the next five years, which is still reasonable."

Latvia has been the cause for most concern recently, despite some apparently encouraging economic indicators. During the last few years, the country has seen high-level sustained economic growth. "For the past five years, Latvia's GDP growth rate has been one of the highest in Europe, averaging 8.13 per cent from 2000–2005 and in 2006 it reached 10.2 per cent real GDP growth," explains Emma Holifield of Property Frontiers.

However, these growth levels are unsustainable over the long term, and Latvia has a continued problem with high inflation rates. Fortunately, the Latvian Government has recently introduced policy designed to deal with this situation, which may help stabilise the Latvian property market. "Recent changes in the capital gains law and mortgage policy was a result of the Latvian Government taking on measures to tackle the inflation," explains Williams. "Latvia's high inflation rates were the main reason the country did not qualify to join the euro, which originally was targeted for 2008. The new anti-inflation plan introduced by the the Latvian Government earlier this year is a significant first step towards stabilising macroeconomic conditions in order to avoid overheating the market.

Williams, though, would put her money on Lithuania as the Baltic property market with the most potential. "It is argued that, in Lithuania, much more economic growth has been generated internally without as much foreign investment driving the property market. This has resulted in average prices being 20–30 per cent lower in Vilnius than in Riga when comparing like-for-like areas. "What's more, Lithuania is a far larger market. "The port city of Klaipeda, for example, is booming." Although concerns over the Baltic property markets has been expressed, it seems that these have yet to show themselves in a fall in prices.

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Article published November 2007