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Apr 08, 2015

Croatian property market's surprise comeback

by Lalaine C. Delmendo


Croatia house pricesAfter six long years of house price falls, Croatia’s property market has made the beginnings of a comeback, despite a struggling economy.

In 2014, the average price of new dwellings sold in Croatia was HRK10,524 (€1,378) per square meter (sq. m.), up slightly by 0.9% (1.4% inflation-adjusted) from a year earlier, according to the Croatian Bureau of Statistics (CBS).

The recovery was primarily led by Croatia’s capital, Zagreb, where the average price of new dwellings sold climbed by 7.7% (8.2% inflation-adjusted) y-o-y to HRK11,958 (€1,566) per sq. m. in 2014. The upper town of Medveščak has the most expensive apartments, with an average asking price of €2,029 per sq. m. in March 2015. Apartments are also expensive in the Center, with an average price of €1,921 per sq. m. On the other hand, Sesvetama Su has the least expensive houses, with an average asking price of €1,129 per sq. m.

In contrast, in other settlements, the average price of new dwellings sold continued to drop by 2.2% (-1.7% inflation-adjusted) y-o-y to HRK9,280 (€1,215) per sq. m. over the same period.

This trend was supported by the latest figures released by CentarNekretnina. During the year to end-Q1 2015, the average asking price of flats in Zagreb increased 1.1% to €1,582 per sq. m. On the other hand, the Adriatic Coast remains depressed, with the average asking price of flats falling by 1.4% y-o-y to €1,577 per sq. m. in Q1 2015.

Most districts still saw house price declines, with Pešćenica-Žitnjak registering the biggest price fall of 17.1% y-o-y in Q1 2015, followed by Črnomerec (-5.5%), Medveščak (-5.1%) and Trešnjevka jug (-5%).

Croatia’s property market experienced a long gloomy road in the past several years, as the global financial crisis, coupled with the eurozone sovereign debt crisis, badly affected the country’s tourism-oriented economy.

  • In 2009, the national property price index dropped 4.32% y-o-y (-6.16% inflation-adjusted)
  • In 2010, the national property price index plummeted by 8.91% (-10.55% inflation-adjusted)
  • In 2011, the national property price index dropped 1.59% (-3.6% inflation-adjusted)
  • In 2012, the national property price index fell by 4.37% (-8.64% inflation-adjusted)
  • In 2013, the national property price index plunged by 14.36% (-14.6% inflation-adjusted). 

In 2014, the economy contracted by another 0.8%, after real GDP declines of 0.9% in 2013, 2.2% in 2012, 0.24% in 2011, 2.3% in 2010, and 6.9% in 2009, according to the International Monetary Fund (IMF). The economy is expected to finally return to growth this year, with a real GDP growth forecast of 0.5%, according to the European Commission.

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 continues to plunge

Croatia Dwellings completed

Housing supply in Croatia 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 and to 10,090 units in 2013.

In 2014, the number of completed dwellings plunged by 26.9% from a year ago, while the useful floor area of completed dwellings also plummeted by 21.5% over the same period, according to the CBS.

The number of dwelling permits remained almost unchanged in 2014 from a year earlier, to 7,743 units, according to the CBS. In January 2015, the total number of building permits plunged by 22.6% from the same period last year.

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. However, residential construction activity started to plunge in 2008, due to the global credit crunch.

Property sales rising again

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 in other settlements. Likewise, the total useful floor area of all dwellings sold also rose 27.4% to 157,316 sq. m. over the same period.

Croatia dwellings sold

From an 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 plunged again to an annual average of about 2,200 units in 2010-2013.

Mortgage market still sluggish

Croatia housing loans

Croatia’s mortgage market expanded from 4.7% of GDP in 2000 to 19.4% of GDP in 2011, with the decline of interest rates during the years to 2007. The main surge in housing loans occurred from 2002 to 2007, as the amount of outstanding housing loans rose 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 and by another 2.4% in 2014, based on figures from the European Central Bank (ECB).

In the year to February 2015 total outstanding housing loans in Croatia rose, but only by a meagre 1.1%.

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% recently.

Low interest rates

Croatia interest rates

In January 2015, the average interest rate for housing loans was 5.11%, down from 5.73% a year earlier. Over the same period, the following average housing loan rates applied:

  • Floating rate and interest rate fixation (IRF) of up to 1 year: 5.1%, down from 5.58% from a year earlier
  • IRF over 1 and up to 5 years:  5.09%, down from 6.9% a year earlier
  • IRF over 5 years and up to 10 years: 6.14%, up from 5.94% a year earlier
  • IRF over 10 years: 5.16%, down from 5.92% in a year earlier

Most mortgages in Croatia are variable rate, indexed to the euro (previously to the deutschemark) or Swiss Francs. In January 2015, more than 89% of all new housing loans drawn had floating rate or with interest rate fixation (IRF) of up to 1 year. On the other hand, about 10% of all new housing loans drawn have IRF of more than 10 years.

Rental market small, moderate yields

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).

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. On the other hand, the scarcity of good resort waterfront real estate on Adriatic coast is expected to continuously fuel strong rental demands in the coming months.

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.

The boom years

Croatia price index

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%.

Meagre economic growth, high unemployment

Croatia gdp inflation

Croatia’s economy has been depressed for six years, losing more than 12% of GDP since 2008, Europe´s second-biggest contraction after Greece. In 2014, the economy contracted by another 0.8%, after real GDP declines of 0.9% in 2013, 2.2% in 2012, 0.24% in 2011, 2.3% in 2010, and 6.9% in 2009, according to the International Monetary Fund  (IMF).

Unlike other new European Union members which experienced an economic boost after their accession, Croatia, which joined the EU on July 1, 2013, entered when the EU was struggling. The Croatian economy is expected to grow by 0.5% this year and by another 1% in 2016, according to the European Commission .

In an effort to boost the economy and revive private spending, the government raised the tax-free portion of salaries in January 2015. "For the first time since 2008, household consumption could provide a mild positive contribution to GDP, mostly because of salary tax changes," said central bank Governor Boris Vujcic.

Moreover, the central bank is also planning to lower the mandatory reserve requirement rate to boost liquidity. Currently, the country’s mandatory reserve rate stood at 12%.

Croatia unemployment

The country’s budget deficit stood at HRK12.8 billion (€1.68 billion) in 2014, according to Finance Minister Boris Lalovac, equivalent to about 3.8% of GDP in 2014, and down from a deficit of 4.6% of GDP in 2013. Since the beginning of 2014, Croatia has been in the European Commission’s Excessive Deficit Procedure (EDP), which envisages that the deficit should be reduced to 3.5% of GDP in 2015 and to 2.7% in 2016.

The country’s public debt was estimated at 81.4% of GDP in 2014. It is expected to reach 84.9% of GDP this year and 88.7% in 2016.

The nationwide inflation rate was -0.2% last year, according to the Croatian National Bank (CNB), the country’s central bank. The CNB expects inflation to average 0.2% this year. From 2009 to 2013, the country’s average annual inflation rate was 2.3%, according to the IMF.

Croatia’s most serious problem is its very high unemployment. Croatia had the third highest unemployment rate among EU countries, following Greece and Spain. In January 2015, Croatia’s unemployment rate stood at 20.3%, up from 19.3% in the previous month but down from 22.4% in the previous year, according to the CBS. In February 2015, there were about 329,890 job-seekers in the country, according to the Croatian Employment Service (HZZ).



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