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It is commonly believed that the mortgage loan market in Poland will be mainly shaped by convergence processes occurring in the entire Polish economy, and especially in the real property market, that have been triggered by Poland's accession to the European Union. The processes will tend to remove real differences (e.g., variations in property prices) and legal discrepancies (mainly by implementing the plan to build a single financial market indicated in the Lisbon Strategy).

Even though the convergence and integration processes are believed to be unavoidable, experts believe that the EU mortgage loan markets will not fully integrate until the year 2010, with the integration being understood as the availability ofthe same product at the same price across EU member states. Only the mortgage loan markets can be expected to converge.

The convergence processes will certainly result in:

• higher share ofmortgage loans in GDP;

• housing loans in excess ofconsumer loans - since mid-2006 the population's debt due to housing loans and consumer loans has been similar, whereas in theEUthe housing debt is 3.5 times higher than consumer debt;

• rising real property prices in Poland, including flat prices;

• housing conditions becoming similar in Poland and the EU.

The shortage offlats puts Poland at the bottom ofEuropean league, in terms ofhousing conditions measured by the number offlats per 1,000 population and average flat area per occupant. It is estimated that Poland needs around 30% more flats for the country to reach the level of average rates in Western European countries, and their total floor area should be approximately twice as large as it is now.

The work on eliminating the inequalities will additionally boost the demand for loans. According to estimates, around 50% ofoutlays on repairs and modernization work will be financed by borrowed money. Not only will the primary market help improve the housing conditions, but the secondary market will have a role to play too.

Transactions in the secondary market are expected to rise and 40% ofpurchases will be financed by loans. In order to ameliorate the quality standards, repairs and modernization work will be necessary that will additionally stimulate the demand for loans. As estimated, approximately 50% of funds allocated to repairs and moderniz

ation will come from loans. There are tendencies to make the employment structure in Poland similar to that in better-developed countries. As a result, persons employed in agriculture (primary sector) will move to the service business (tertiary sector). In Poland, the primary sector concentrates today around 19% ofthe country's labour force, whereas in France, Sweden and the UK the rates are 5%, 3% and 2%, respectively.

An additional factor stimulating demand can be the state's interventionism under which interest rates on loans taken out to purchase a flat or single-family house will be subsidized.

Altogether, the above changes are the source ofa further, long-term growth in the demand for mortgage loans. The question must be asked, though, whether the demand growth will still be accompanied by the number of actually granted loans increasing as fast as today. We need to remember that the mortgage loan market expands because ofboth demand and supply. It seems that despite banks' positive opinion on mortgage loans as an asset in their portfolios, the dynamics of the loans granted in the years 2005-2006 will not go on. This forecast is underpinned by several factors.

• Low supply ofland for residential building, the underdeveloped construction industry and strong demand make flat prices grow. At the same time, the affordability of housing measured by the number of square metres a consumer can buy for a monthly pay is declining - in the fourth quarter of 2006, the rate was 0.4 - over 30% less than a year before.

• Fast growing prices and concerns that a housing price bubble might appear. The dynamic growth ofprices is not balanced - it is propelled by a strong inflow ofmoney coming from the banking sector. The phenomenon has been clearly recognized by the banking sector specialists that recommend a higher degree ofcautiousness when granting loans in towns with the highest prices offlats.

• State intervention. Subsidies to interest on loans stimulate demand for flats, which increases their prices. As a result, flats become less affordable for the poor families and lenders' risks are even larger.

• Higher lending risk that can be additionally aggravated by the enactment of the consumer bankruptcy law. The law exempts from bankrupts' property 10 sqmofa flat per debtor and each oftheir dependents. This challenges the institution ofmortgage as a collateral safeguarding lender's money - some mortgage-secured housing loans may turn out to be legally unrecoverable.

Because the factors expose lenders to higher risks, they can increase loan prices and reduce the demand for loans. Forecasts developed by the banking specialists predict that the total amount ofhousing loans will reach 190 billion PLN (49.6 billion EUR, the exchange rate from the end of 2006) by the year 2010 and the loans to GDP ratio will be 12-14% comparing to 8% nowadays (Pawłowicz and Krysiak, 2006). Altogether, the real property market will continue to expand, although the pace ofits growth will decelerate.

It is also worth mentioning that mortgage banks issue mortgage bonds. Therefore, investors have the opportunity to invest in the property market via securities backed by pooled mortgages. However, the market expands at a slow rate - only four banks were established and three are still operational. The issues ofmortgage bonds accomplished by end 2006 totalled 453.39 million EUR.