Prices of real estate in Bulgaria are certain to start a downward trend in 2006 because of the slightly but constantly diminishing interest towards Bulgarian property.

This is one of the conclusions in a report on Bulgaria's residential property market in 2005, published on March 20 by the independent analytical company Industry Watch.

While the price of Bulgarian stock, measured through the Bulgarian Stock Exchange - Sofia blue-chip index SOFIX increased by 32 per cent in 2005, the average prices of housing properties in this country went up by only 21.6 per cent, Industry Watch said. This means that investment in shares of companies traded on the stock exchange has become more attractive to investors.

Return on investment in other sectors, like oil and metals has also become higher at 60 per cent.

The growth in the supply of new residential properties remains upbeat. Two thirds of all construction permits in the one-year period under review were issued in the country's five largest cities where developers can find better profit margins, said Industry Watch.

The Black Sea city of Bourgas leads the capital Sofia and Varna (also on the Black Sea) in terms of apartment building permits. The speculative demand driven by second-home buyers will ensure a sustainable level of construction activity in the region over the near-term, experts say.

Growing supply will level off residential property prices in Sofia. The trend has already impacted several market segments in the capital where prices for some types of properties declined in late 2005. Speculative buyers, both locally and non-locally financed, remain the most significant market factor, Industry Watch says.

Bourgas has the most overvalued real estate market given that the price of services in the coastal city is significantly lower than those in Sofia whereas the property prices lag the capital by only eight per cent. The property markets in Shoumen, Rousse, Plovdiv and Pleven are undervalued, said Industry Watch.

Meanwhile, according to Industry Watch, mortgage credits are attracting a constantly increasing number of Bulgarian households. Housing loans represented 28.8 per cent of all debts of households in January 2006, compared to 27 per cent in September 2005.

However, the share of mortgage loans in the overall debt of the households still remains low compared to the European Union member countries, where the average share is around 69 per cent.

In the eurozone, the growth in mortgage lending is also outperforming the overall growth in credits. It was 12.5 per cent in 2005.

The recent decisions by the US Federal reserve and the European Central Bank to raise their basic interest rates has hiked the global price of capital. Nevertheless, the current situation on the mortgage markets shows that much more time will be needed for the interest-hike measures to influence these markets.

The competitive pressure forces creditors to maintain low interest-rate levels on mortgage loans, in spite of the two central banks' steps. For instance, in the eurozone, the average interest rate on mortgage loans dropped from 4.4 per cent in end-2004 to 3.95 per cent in end-2005, while the basic interest rate moved up from two to 2.5 per cent.