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After running a property development business in London, Colin Halliwell and his Polish girlfriend, Malgorzata Kuriata, moved to another land of opportunities: Warsaw.

For more than 1 million zloty, or $313,000, they bought a prewar house of 200 square meters, or 2,200 square feet, in the city's prestigious Mokotow district. They plan to add another floor, renovate the whole building into three luxurious apartments and then sell. Since their investment about a year ago, prices in the neighborhood have already gone up by more than a third.

"We looked at what has happened on the property markets after Spain and Ireland entered the EU, and we thought, there must be a boom," Kuriata said.

And there has been.

Since Poland entered the European Union two years ago, residential prices have soared as the growing economy and falling interest rates prompted the country's newly created middle class to buy their first homes since the fall of communism. But there was a limited supply, and, due to the lack of master plans for development and lengthy permit procedures, construction has not been able to keep up with demand.

According to a recent report by the Knight Frank real estate agency, sale prices in Warsaw last year grew by 10 percent to 20 percent, depending on location, with the most significant increases - as much as 30 percent - in the central Srodmiescie district and in Mokotow, both areas dotted with old buildings that have recovered their prewar elegance after costly renovations. Apartments in the densely developed Kabaty district, along the only Metro line, have also experienced steep increases because the city lacks good public transportation and has constant traffic jams. Even cramped apartments in drab communist-era housing projects and the decaying prewar buildings on Warsaw's right bank are now more costly.

The growth has not been limited to Warsaw. In the first four months of 2006 prices have risen by 14 percent in Krakow, 13 percent in the tri-city chain of Gdansk, Sopot and Gdynia along the Baltic, and as much as 20 percent in the historic city of Wroclaw, in the southwest.

Selected investments have brought even higher returns. For example, there was a 48 percent increase in prices between June 2005 and April 2006 at the Marina Mokotow, a sprawling 14-building development in Warsaw that was financed by the state-owned PKO Bank Polski, Poland's largest bank, and the European Bank for Reconstruction and Development. Also, the large Salwator City development in Krakow, which has views of the Old Town, had a 64 percent price increase between November 2005 and April 2006, according to redNet Property Consulting in Warsaw.

"The market is crazy," said Marek Strzelecki, 40, a Polish professional who has been looking for a three-bedroom apartment in Warsaw's Mokotow area for a year. "Prices are rising in your eyes."

Lukasz Madej, director of redNet, said: "This year will be another hot year. The average price of 5,500 zlotys per square meter in Warsaw is still low compared with other EU cities. It will catch up." That is the equivalent of €1,360, while, for example, the average price per square meter in Madrid is €5,000 and in Dublin, €4,300.

Analysts expect the country's urban population to grow - only 4 percent of Poland's population lives in the capital, compared with an average of 10 percent in other EU countries - and for its housing supply to lag behind demand for several years to come. According to Knight Frank, Warsaw now needs some 103,000 housing units but construction began on only 10,000 in 2005.

Meanwhile, mortgage lending grew by 30 percent, to 45.8 billion zlotys, at the end of last year. And, with the economy expected to increase by more than 5 percent this year, further growth is likely because home loans account for only 5 percent of the country's gross domestic product, about seven times less than the average in EU countries.

Encouraged by the financial signs, foreigners have been investing. They make up 5 percent to 7 percent of all buyers countrywide, but in selected developments - like Miasteczko Wilanow, or Town of Wilanow, built on Warsaw's outskirts by the Spanish developer Fadesa - foreigners accounted for about 90 percent of the sales.

"It's mostly Irish and English who bought investment properties in Spain, and perhaps in France, and now are looking East," said Steven Doran, a Briton who used to be the mortgage manager at Bank Zachodni WBK in Warsaw. Doran is now an owner of Capital Properties, an agency that helps foreigners buy property in Poland.

But experts caution that such investments, while generally promising, are not without their risks. "Poland is not Spain," said Dror Kerem, president of Ronson Development in Warsaw. "It does not attract so many tourists or retirees; people don't buy second houses here."

In addition, Polish law is very protective of tenants' rights, so evicting a tenant who does not pay rent could be a long, drawn-out process, and new units are sold unfinished, so completing them increases the initial costs.

In the secondary market, which frequently involves renovating and reselling prewar buildings, as Halliwell and Kuriata have planned, the fact that only about 15 percent of the Warsaw area has master plans means that investors are likely to run into obstacles. For example, their project has been delayed for months because officials cannot decide whether the renovation needed official approval.

Another reason for prudence is that price growth has been so steep in some segments that future yields may be smaller. For example, some apartments already cost €4,000 per square meter or even more, as in the Belvedere Residence, near Warsaw's historic Lazienki Park, where prices are €6,000. "This is already pretty high, even for the old EU countries," so the yields will not increase quickly, Madej said.

Over all, price growth in Warsaw and Krakow is expected to slow - most analysts expect a total of 10 percent to 15 percent over the next five to seven years - while the markets in smaller cities begin to emerge. For example, a loft with 5.5-meter-high ceilings in a former factory in Poznan, in western Poland, is still only 3,500 zlotys per square meter.

"Make your choices well," Kuriata said. "The market is such that one cannot lose, but one might make much smaller profit than he could have made."

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