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Oct 24, 2013

Croatian housing market in the doldrums


 Croatia house prices

Croatia’s economic downturn continues. So does the contraction of its housing market.  But like Portugal, Croatia's market is two speed.  Most of Croatia is depressed, with falling property prices.  Then there is the Adriatic Coast, of which foreigners cannot get enough.

In Croatia’s capital, Zagreb, the average asking price of flats fell by 5.5% during the year to September 2013, to €1,593 per sq. m., according to property portal CentarNekretnina. When adjusted for inflation, asking prices have declined by 6.6%.

Smaller price drops were experienced on the Adriatic Coast, with the average asking price of flats declining by 3.3% during the year to September 2013, to €1,581 per sq. m.

Most districts suffered from house price declines, except for Gornja Dubrava (4.7% growth) and Sesvete (0.9% growth).

Pešćenica – Žitnjak had the sharpest price drop, declining by 9.7% to €1,617, during the year to September 2013, followed by Novi Zagreb – West (-9.2%) and Novi Zagreb – East (-8.8%).

The upper town of Medveščak has the most expensive apartments, with an average asking price of €2,177 per sq. m. in September 2013. Apartments are also expensive in the Center, with an average price of € 2,017 per sq. m.

Property prices in Croatia have been falling for the past four years.

  • In 2009, the national property price index fell by 4.8% y-o-y (-6.5% in real terms)
  • In 2010, the index fell by another 4.8% (-6.5% in real terms)
  • In 2011, the national property price index fell by 1.3% (-3.3% in real terms)
  • In 2012, the national property price index fell by 3.1%

The number of dwelling permits issued fell by 32% in the year to August 2013, according to the Croatian Bureau of Statistics.

The property market has been affected by the stagnating economy and the Euro zone debt crisis. In 2013 the Croatian economy is expected to contract by 0.6%, according to the IMF.

Accession to the European Union took place on July 1, 2013, and will likely open up the Croatian economy. However, the benefits are unlikely to be felt immediately, in fact increased emigration may hit the labour market, and hence the real estate market as well.

However, the economy is expected to recover with 1.5% growth in 2014.

Some believe that Zagreb’s property market is likely to be shaken up soon by the sale of around 3,500 state-owned apartments, with a purchase price of around €700 per sq. m. Also in the offing is an estate tax and the introduction of energy certificates.

However the energy certificate is only likely to have a small impact on prices, says Maruska Vizek of the Research Institute of Economics. Similarly, Josip Tica, a professor of macroeconomics and economic development at the Zagreb Faculty of Economics, expects prices to continuously slide by 3%-6% annually.

Croatia’s spectacular coast

There are about 70,000 foreigners who own property in Croatia, mostly on the Adriatic Coast. Due to complexities regarding taxation and foreign ownership rules, most bought through a company.

However, amendments were made to the Croatian Law on Ownership implemented in February 2009, and now treats EU nationals as Croatian citizens for the purposes of acquiring real estate in Croatia. The legislation aims to ease the buying process and attract more buyers to the country.

Non-EU foreign nationals, on the other hand, may buy a property in Croatia based on reciprocity agreement between Croatia and the foreign buyer’s home country.

Real estate is more actively traded on the Adriatic and other popular tourist destinations. The Northern peninsula of Istria is home to a property boom fuelled by German buying.

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.

Housing supply near Civil War levels!

In non-tourist Croatia, supply continues to fall rapidly.  Amazingly, current levels of completions and permits issued are close to levels during the War of Independence (1991-1995), when dwelling completions fell to less than 10,000 annually from the previous range of 20,000-30,000 annually between 1981 and 1990.  From an average of 24,366 annual housing completions 2006-2008, completed flats fell to 11,792 units in 2012.

Croatia Dwellings

This year will be significantly worse.

9,742 permits were issued in 2012, down from 23,344 permits issued annually from 2003-2008.   Again this year will be significantly worse.  As of August 2013, the number of dwelling permits issued was only at 4,678, down by 32% from 6,884 permits recorded by August 2012.

The shift from socialism to a market economy saw much privatization in favour of authoritarian President Fradjo Tudjman’s cronies. Dwelling construction increased to an average of 12,787 units p.a. from 1996 to 1999, still far from enough.

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.

Slower mortgage market growth despite low interest rates

Croatia’s mortgage market expanded from 4.7% of GDP in 2000 to 19.1% of GDP in 2012, with the decline of interest rates during the years to 2007. The surge of housing loans occurred from 2002 to 2007, as the amount of outstanding housing loans rose annually by an average of 29%.

Croatia housing loans

However with Croatia’s economy n the doldrums the past two years, outstanding housing loans grew by only 3.3% in 2011, and contracted by 0.7% in 2012.

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 observed in the building societies’ share of loans, from 1% in 2003 to 5% in 2010.

Croatia interest rates

As of August 2013, interest rates on housing credits loans were 5.5% , up from 5.4% last July. Most mortgages in Croatia are variable rate, indexed to the euro (previously to the deutschemark) or Swiss Francs.

Interest rates are expected to be fall because of Croatia's entry to the European Union in July 1, 2013, due to anticipated direct competition from foreign banks.

Rental market small, moderate yields

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

Croatia’s long-term rental market is very small, concentrating on short-term holiday rentals for foreigners and tourists. Most long-term rental properties are 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 center and around the university campus.

Depending on the equipment and location, monthly rents in Zagreb for one-bedroom apartments range from €200 to €250, while two-bedroom apartments can be rented at around €300. A 50 sq. m. apartment in Zagreb can be rented at around HRK 2,741 (€360) per month, while monthly rent for a larger 175 sq. m. apartment is around HRK 13,706 (€1,800).

The scarcity of good resort waterfront real estate on Adriatic coast is expected to continuously fuel strong rental demands. Rents for three-bedroom seaside flats located in the Adriatic Coast range from HRK 11,787 (€1,548) to HRK 27,526 (€3,615) per month. Two-bedroom houses in the same area can be rented from HRK 11,467 (€1,506) to HRK 16,835 (€2,211) per month, according to the www.longtermlettings.com.

Gross rental yields in Croatia’s capital, Zagreb, are moderate, at around 4.56% to 5.60% for apartments, while houses have better yields ranging from 7.92% to 8.87%, according to a Global Property Guide research conducted in September 2011. There is no particular connection between size of apartment and yields.

The boom years

Croatia Average price new dwellings

The high point of the boom was perhaps 2007, an exceptional year in the Croatian housing markets. The average price of newly built dwellings in Croatia surged 26% to HRK 11,252 (€1,477) per sq. m. from HRK 8,939 (€1,173) in 2006. This was in sharp contrast to 0.7% (3.9% in real terms) drop in house prices in 2005, and the negligible 0.3% increase in 2006 (2.8% drop in real terms).

While housing demand and supply has been increasing since 2001, the erratic movement of house prices can probably be attributed to changes in speculative demand. 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%.

Recession; high public debt

Croatia gdp unemployment

Croatia’s economy has been depressed for 4 years since the global financial crisis. In 2012, the economy contracted by 2%.

During the year to Q2 2013, Croatia’s GDP shrank by 0.7%, an improvement from the previous quarter’s 1.5% contraction, based on the figures from Croatian Bureau of Statistics. Despite the GDP decline, Deputy Prime Minister Branko Grcic is hopeful of a possible recovery in the next period. All GDP components rose in Q2 2013, except for the import sector.

Unlike other new European Union members who experienced an economic boost after their accession, Croatia, which joined the EU on July 1, 2013, rather entered at a time when EU is struggling from its own crisis. The economy is expected to remain in recession during 2013. The Croatian National Bank expects a 1% GDP decline in 2013. GDP recovery is seen to happen in 2014.

In 2009, Croatia's economy contracted by 6.9%. The recession slowed in 2010 with a 2.3% drop, and declined by 0.05% in 2011. Croatia had enjoyed moderate growth from 2000 to 2007, expanding by an average of 4.6%, before it slowed to 2.1% in 2008.

In September 2013, Fitch Ratings downgraded Croatia's credit rating to junk citing the country’s deteriorating fiscal outlook. Before Fitch Ratings, Standard & Poor’s already downgraded Croatia’s rating to junk status in December 2012, followed by Moody’s Investors Service in February 2013.

In an attempt to slow down Croatia’s budget deficit and public debt, the government moved to privatize its last state-owned bank. The country’s public debt is currently at around 55% of GDP, and is expected to rise higher than the 60% EU threshold ,to 62.5% of GDP in 2014. The budget deficit this year reached 3.4% of GDP in 2013’s first half, and is forecast to widen to 4.7% of GDP.

In September 2013, inflation was 1.1% , down from 3.4% in 2012.
Croatia’s most serious problem is its very high unemployment. Croatia has the third highest unemployment rate in the EU, following Greece and Spain. As of September 2013, Croatia’s unemployment rate was at 19.1%, up from an average of 8.9% from 2007 to 2009.





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