TRENDS:Investors in Bulgarian resorts like Bansko and Sunny Beach have been hard hit but Krakow, Budapest and Bucharest should bring rewards for those who can sit tight. Daniel McLaughlinreports from Budapest

FOR ALMOST a decade now, a swathe of ex-communist eastern Europe has been a magnet for western property-hunters. Whether seeking a quick buck or long-term investment potential, they were drawn to countries that were on the road to European Union membership, were desperate to attract foreign investment, and were experiencing rates of growth that were the stuff of dreams in more developed economies.

More important than the broad stability of their political course was the fact that their property prices were extraordinarily low, and all the indicators pointed upward: as incomes rose so would domestic demand for higher quality housing, and credit markets would open up to help people buy new homes.

At the same time, growing cities from the Baltic to the Balkans, from Tallinn in Estonia to Sofia in Bulgaria, were not only sucking in workers from the provinces but attracting international firms with foreign employees who also needed somewhere to live, creating yet more demand for real estate.

To oil the wheels of this money-making machine, low-cost airlines sprang up to whisk westerners away to Riga and Krakow, Prague and Budapest, where many would stay in new hotels and refurbished apartments, and some would return home having joined the growing ranks of east European property owners.

Dublin dinner table conversation soon turned to tales of 500 per cent gains on apartments in Tallinn, Riga and Vilnius, the capitals of Baltic states whose economies were expanding at around 10 per cent each year; further south, double digit annual growth was commonplace for real estate in bigger markets like Poland, the Czech Republic, Hungary and Slovakia; and more recently, as their 2007 accession to the EU approached, Romania and Bulgaria delivered spectacular returns to investors venturing into the Balkans.

But how times have changed.

Having ridden high on a wave of cheap credit, the Baltic tigers are now struggling to service repayments and purse strings are being tightened across the region. Latvia and Estonia are facing recession, Lithuania is suffering a sharp economic slowdown, and property prices in all three nations are plummeting.

In a recent report by Knight Frank, the Baltic states were among the countries where house prices were falling most quickly, with Latvia leading the way with a 24.1 per cent drop from mid-2007 to mid-2008.

The Knight Frank study named Bulgaria as its property price "winner", with gains of 32.2 per cent over the same period, but analysts warned that such figures could be deceptive.

A glance at any of the websites that have sprung up to help people quickly sell their foreign property (like www.propertyauction.ie) will show that much Bulgarian real estate is proving extremely hard to shift, even at a deep discount.

The rush of money into tiny ski resorts like Bansko, or Black Sea hotspots like Sunny Beach, has fuelled the construction of vast numbers of properties, many of which are devoid of quality or charm.

They are now sitting empty due to oversupply, and the fact that Bulgarians and foreigners are already watching their budgets and taking fewer holidays.

Real estate agencies say at least a third of Bansko's 2,200 foreign-owned holiday flats are now on sale again, sometimes at half their original price.

"Many buyers who live in the UK and bought in Bulgaria are now trying to re-sell," said Christophe Gater of New Estate Consultancy in London, which specialises in Bulgaria. They cannot afford their costs back home." Any brave buyers now looking to snap up a bargain in Bulgaria should beware the credit crunch that is now striking the country's building sector, and could yet trigger a wave of bankruptcies.

Bulgarian media report that building firms are sacking workers in Bansko and on the Black Sea coast, and that dozens of hotels in Sunny Beach are now on sale for €1 each, in the hope of finding buyers to repay the large - and increasingly costly - loans that their owners took out to fund construction.

Late last month, the London-listed Black Sea Property Fund postponed a residential project in Sofia, due to what it called "a tightening of credit in Bulgaria, as well as oversupply in certain market segments and overextended developers", while the UK-based Bulgarian Land Development company said it was seeking to reduce risk exposure by cutting the number of off-plan units that it was underwriting in Bansko.

In the countries that separate the Baltic states from Bulgaria, the news is not quite so alarming.

Hungary's yawning budget deficit and reliance on foreign debt saw it spiral into severe difficulty when international credit markets dried up, forcing the country to take a €20 billion loan from the International Monetary Fund and other organisations.

The property market has been cooling off for a number of years however so, while interest among domestic and foreign buyers has decreased, prices have not plunged.

Analysts believe that a tight credit market may dampen domestic property demand in Hungary for several years, but most still see Budapest delivering gains for investors over the mid- and long-term, particularly in well renovated older buildings that stand out from the crowd of homogeneous new-builds.

Though their stock markets and currencies have all lost considerable value, the financial crisis has been less hard on Poland, the Czech Republic and Slovakia, where a decade of economic growth has been driven by exports rather than credit-fuelled domestic demand for consumer goods and property.

Real estate price rises are slowing down in towns and cities across these countries, as locals become more wary of taking out mortgages, but most regional experts still see them as good long-term bets for capital growth, driven less by speculation than by genuine demand for new and better housing.

During the recent stock market collapse, traders shunned talk of a "crash" or a "meltdown" in favour of a "flight to quality", in which they moved money away from risk into more secure investments; the returns may not be as spectacular as those promised by more exotic products, but they are certainly more reliable.

A similar scenario can now be seen in property markets, with emerging holiday resorts like Sunny Beach or Bansko likely to do less well than a capital like Sofia - or any number of major cities across eastern Europe - where housing demand is being driven by a net inflow of workers and the desire of millions of people to move out of dilapidated Soviet-era accommodation.

A huge property bubble has burst messily in the Baltic states, and enthusiasm for Bulgaria's resorts is fast deflating, but in most of eastern Europe the bubble was smaller and the air is being released only slowly.

A drop in local demand means times are tough for those who need to sell foreign property quickly to cut costs or fund mortgage payments at home. But for those who can sit tight and ride out the current turbulence, that condominium in Krakow or that bijou pad in Bucharest is still likely to bring rewards in the years ahead.