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Apr 14, 2016

Croatia’s housing market to grow modestly in 2016

by Lalaine C. Delmendo


Croatia house pricesAfter six long years of house price falls, Croatia’s property market is now recovering, with the economy improving.

During 2015, the average price of new dwellings sold in Croatia was HRK10,688 (€1,420.60) per square metre (sq. m.), up by 1.6% (1.9% inflation-adjusted) from a year earlier, according to the Croatian Bureau of Statistics (CBS).

  • In Croatia’s capital, Zagreb, the average price of new dwellings sold dropped slightly by 1.3% (-1% inflation-adjusted) y-o-y to HRK11,797 (€1,568) per sq. m. in 2015.
  • In other settlements, the average price of new dwellings sold rose by 3.6% (4% inflation-adjusted) y-o-y to HRK9,617 (€1,278) per sq. m. over the same period.

During the year to end-February 2016, the average asking price of flats in Zagreb increased 1.01% to €1,598 per sq. m., according to CentarNekretnina.

The Adriatic Coast performed spectacularly, with the average asking price of flats surging by 15.57% y-o-y to €1,826 per sq. m. in February 2016, thanks to increasing interest from international homebuyers.

Croatia’s property market has been depressed for years, as the global financial crisis and the eurozone crisis, hit the country’s tourism-oriented economy.

  • In 2009, the national property price index fell 4.32% y-o-y (-6.16% inflation-adjusted)
  • In 2010, the national property price index fell 8.91% (-10.55% inflation-adjusted)
  • In 2011, the national property price index fell 1.59% (-3.6% inflation-adjusted)
  • In 2012, the national property price index fell 4.37% (-8.64% inflation-adjusted)
  • In 2013, the national property price index fell 14.36% (-14.6% inflation-adjusted). 
  • In 2014, the market started to recover, with the national property price index increasing by 1.22% (1.69% inflation-adjusted)

The total number of dwellings sold surged by almost 21% to about 2,410 units in 2014 from a year earlier, according to the CBS. Of these about 47% were in Zagreb while the remaining 53% were elsewhere. The total useful floor area of all dwellings sold also rose 27.4% to 157,316 sq. m. over the same period.

This coming year “the average property price is expected to slightly increase due to landmark projects already on the market and coming to the market,” said Colliers International.  “The Croatian real estate sector expects several developments and transactions in 2016, underpinned by better economic climate, yield opportunities and improved investor sentiment.” Moreover, demand from wealthy European homebuyers is expected to increase.

After six years of economic recession, Croatia’s economy grew in 2015, with GDP growth of 1.6%, thanks to strong tourism on its Adriatic Coast. The economy is expected to expand by 2.1% this year, the highest growth since 2007, according to government estimates.

Croatia's housing market has sometimes moved almost counter-intuitively, surging in bad times. That may be because wealthy Croatians traditionally park their wealth in housing in times of uncertainty. For instance, when the economy started to weaken in late 1998, demand for new housing increased substantially. The average price of new houses rose by almost 20% in 1999 - the year of President Fradjo Tudjman’s death - while the economy contracted 0.8%.

Zagreb districts’ house price variations

Zagreb districts showed considerable variations in house price movements. Donji Grad – Centar registered the biggest price increase of 6.44% y-o-y in February 2016, according to CentarNekretnina. It was followed by Gornji Grad – Medveščak (4.28%), Novi Zagreb – Istok (3.91%), Pešćenica-Žitnjak (3.77%), Crnomerec (3.71%), Trešnjevka sjever (3.5%), Podsused – Vrapce (2.04%) and Novi Zagreb – Zapad (0.8%).

In contrast, Gornja Dubrava registered the biggest annual price decline of 7.66% in February 2016, followed by Donja Dubrava (-4.96%), Podsljeme (-4.41%), Sesvete (-2.36%), Trešnjevka jug (-1.64%), Stenjevec (-0.74%), Maksimir (-0.07%), Trnje (-0.02%).

The upper town of Medveščak has the most expensive apartments in Zagreb, with an average asking price of €2,121 per sq. m. in February 2016. Apartments are also expensive in the Centar, with an average price of €2,050 per sq. m. On the other hand, Sesteve has the least expensive houses, with an average asking price of €1,098 per sq. m.

Croatia’s spectacular coast

About 70,000 foreigners own property in Croatia, mostly on the Adriatic Coast. The Northern peninsula of Istria is home to a property boom fuelled by German buying.

Due to complexities regarding taxation and foreign ownership rules, most bought through a company.  However, amendments made to the Croatian Law on Ownership in February 2009 now treat EU nationals as Croatian citizens for the purposes of acquiring real estate in Croatia.

The right of non-EU foreign nationals to buy a property in Croatia depends on reciprocity agreements between Croatia and the foreign buyer’s home country.

Around 55% of approved permits for foreign acquisitions were granted to Germans. Austrians come in second place with 16% of permits granted, followed by Britons (6%), Hungarians (4%) and Dutch (3%).

Of Croatia’s 20 counties (or regions), the five most popular with foreign buyers are on the Adriatic Coast: Istria (33% of foreign-owned properties), Primorje-Gorski Kotar (26%), Split-Dalmatia (12%), Zadar (8%), and Dubrokniv-Neretva (6%). Only 3% of foreign buyers chose Zagreb City.

Continued interest in Croatia’s high-end market

Croatia’s high-end residential market is now again attracting more foreign buyers. Slovenians represented the largest portion in 2015, at about 43%, according to Colliers International, followed by Germans, Italians and Austrians (35%), and Scandinavians (8%).

Dubrovnik, Istria, Opatija, and Split had most luxury villas, said Colliers.  The islands of Hvar, Brač, Pag, and Krk also have a lot of high-end residences.

Croatia dwellings sold

The most demanded luxury are the smaller house with a price of up to €500,000, according to Colliers. Within the country’s popular resorts, studio apartments are priced at around €170,000, while luxury penthouses sell for €1 million.

From average sales of 1,500 dwelling units from 2001 to 2005, the number of dwellings sold more than doubled to an average of about 3,100 units annually from 2006 to 2009. However, sales fell again to an annual average of about 2,200 units in 2010-2013, with some recovery apparent in 2015.

Supply continues to plunge

Amazingly, current levels of dwelling completions and permits issued are close to those during the War of Independence (1991-1995), when completions fell to less than 10,000 annually from the previous annual range of 20,000-30,000 between 1981 and 1990. From an average of 24,366 annual completions 2006-2008, completed flats fell to 11,792 units in 2012, to 10,090 units in 2013, and 7,805 units in 2014.

Croatia dwelling permits

In 2015, the number of permits issued for dwellings fell by 10.24% to just 6,950 units from a year earlier, while the useful floor area of dwelling permits dropped 7.8% to 650,126 sq. m. over the same period, according to the CBS. Dwelling permits averaged about 22,200 units annually from 2001 to 2008.

Likewise, the number of building permits issued also declined by 4% y-o-y in 2015, to 6,328 units.

President Fradjo Tudjman’s death in December 1999 and the subsequent election of a new government led to substantial reforms in the economy and a sudden increase in house prices in 1999. As a result, construction surged to 17,487 completions in the year 2000. Around 18,000 dwellings were completed annually from 2002 to 2005. During 2006-2008, completions rose even further, exceeding 20,000 units annually, while permits issued ranges from 24,000 to 25,000. Improved economic conditions combined with the launch of cheap housing programs and changes in ownership laws, plus new zoning restrictions and building regulations, then led to further increases in construction activity.

However in 2008, due to the global credit crunch, residential construction activity started to plunge. The sector has not recovered since then.

Mortgage market still sluggish

Croatia housing loans

Croatia’s mortgage market quadrupled in size from 2000 to 2011, expanding from 4.7% to 19.4% of GDP, as interest rates fell during the years to 2007. The main surge in housing loans occurred from 2002 to 2007, with housing loans rising annually by an average of 29%.

However with Croatia’s economy in the doldrums the past six years, outstanding housing loans rose by only 3.3% in 2011, and contracted in the years after—by 0.8% in 2012, by 2.8% in 2013, by 2.4% in 2014, and by another 1.7% in 2015, according to the European Central Bank (ECB).

In January 2016, total outstanding housing loans in Croatia stood at HRK56.87 billion (€7.56 billion), down by 9.9% from the same period last year, according to the Croatian National Bank (CNB). Kuna-denominated housing loans indexed to the euro accounted for the largest portion, at 69% of total housing loans in January 2016. About 21% of the total housing loans were indexed to the Swiss franc while the remaining 10% were not indexed to any foreign currency.

Nevertheless, Croatia’s mortgage market has developed significantly during the past decade. The old large state-owned banks have been privatized, and commercial banks have been restructured. Austrian, Italian and German banks have entered the market. There was a significant increase in building societies’ share of loans, from 1% in 2003 to 5% recently.

Mortgage interest rates

Croatia interest rates

In January 2016, the average interest rate for housing loans indexed to foreign currency - almost 90% of total outstanding housing loans - was 5.67%, up from 5.63% the previous month and 5.31% in a year earlier.

Rates for housing loans indexed to foreign currency:

  • Floating rate and interest rate fixation (IRF) of up to 1 year: 5.68%, up from 5.37% a year earlier
  • IRF over 1 and up to 5 years:  4.58%, down from 5.19% a year earlier
  • IRF over 5 years and up to 10 years: 4.72%, down from 5.28% a year earlier
  • IRF over 10 years: 4.64%, down from 4.84% in a year earlier

The average interest rate for housing loans not indexed to foreign currency fell slightly to 5.04% in January 2016, from 5.08% in a year earlier.
Rates for housing loans not indexed to foreign currency:

  • Floating rate and IRF of up to 1 year: 5%, slightly down from 5.08% a year earlier
  • IRF over 1 and up to 5 years:  4.99%, down from 5.09% a year earlier
  • IRF over 5 years and up to 10 years: 5.14%, down from 6.14% a year earlier
  • IRF over 10 years: 5.06%, down from 5.16% in a year earlier

Most mortgages in Croatia are variable rate, indexed to the euro (previously to the deutschemark) or Swiss Francs. About 90% of all new housing loans were floating rate or with interest rate fixation (IRF) of up to 1 year.

Rental market small, moderate yields

Croatia interest rates housing loans

Gross rental yields in Croatia’s capital, Zagreb, are moderate to good, at around 6.0% to 6.3%, according to a Global Property Guide research conducted in September 2014. There is no particular connection between size of apartment and yields.

Most Croatians are owner-occupiers. About 92% of Croatian households own a house or apartment, according to Zagreb nekretnine Ltd (ZANE).

The long-term rental market is very small. The rental market concentrates on short-term holiday rentals for foreigners and tourists, with good resort waterfront real estate on Adriatic coast fuelling demand.

Croatia price index

Most long-term rental properties are in Zagreb, Dubronik, and Split. In Zagreb, the demand for rental properties partly comes from students studying at the University of Zagreb, as in Split, where the greatest demand is in the city centre and around the university campus.

A 65 sq. m. apartment in Zagreb can be rented at around HRK4,155 (€545) per month, while monthly rent for a larger 175 sq. m. apartment is around HRK11,825 (€1,551) per month, according to a research conducted by the Global Property Guide in September 2014.

Improving economy, high unemployment

After six years of economic recession, Croatia’s economy finally grew in 2015, with GDP growth of 1.6%, thanks to strong tourism on the Adriatic Coast. Despite this, Croatia has obviously not yet fully recovered. From 2009 to 2014, the economy lost more than 12% of GDP, Europe’s second-biggest contraction after Greece. The economy contracted by 7.4% in 2009, 1.7% in 2010, 0.3% in 2011, 2.2% in 2012, 1.1% in 2013, and 0.4% in 2014, based on figures from the International Monetary Fund  (IMF).

The economy is expected to expand by 2.1% this year, the highest growth since 2007, according to government estimates.

Croatia’s most serious problem is high unemployment, the third highest in the EU, following Greece and Spain. In January 2016 unemployment stood at 16.4%, down from 17.5% the previous year, according to the CBS. Youth unemployment was 44.1% in January 2016.

Worrying political developments

Croatia gdp inflation

In the November 2015 parliamentary elections, the centre-right coalition, led by the HDZ  won 59 seats and declared victory.  But this is well below the 76 seats needed for a parliamentary majority.

The new government is already losing investor confidence and alienating international creditors, focusing on ideological and political quarrels and not on investment and reforms.

"If the government turns quickly to legal changes to make the country more attractive to investors, we could have higher growth in the future which would also help the fiscal consolidation. A lot depends on how strong the ruling coalition is," said Marina Tkalec from the Zagreb Economic Institute.

In March 2016, Moody’s Investors Service downgraded Croatia’s credit rating from Ba1 to Ba2, with negative outlook.

Croatia unemployment

Unlike other new European Union members, which experienced an economic boost after their accession, Croatia joined the EU on July 1, 2013 when the EU was struggling. Since the beginning of 2014, Croatia has been in the European Commission’s Excessive Deficit Procedure (EDP) due to its high budget deficits and public debt. The EU is now urging the country to reduce the budget gap to below 3% and the public debt to sustainable levels.

The country’s public debt was 86% of GDP in 2015, slightly up from 85.1% of GDP in 2014, according to the European Commission.  The country’s budget deficit was about 4.2% of GDP in 2015, from around 5.6% of GDP in 2014 and 4.6% of GDP in 2013, according to the European Commission . The Croatian government hopes to narrow the deficit to 2.7% of GDP this year, though international organizations regard this as too optimistic.

Inflation was -0.3% in 2015, from 0.2% in 2014, according to the European Commission. The inflation rate is expected at 0.3% this year before accelerating to 1.6% in 2017. From 2004 to 2013, the country’s average annual inflation rate was 2.9%, according to the IMF.



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