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Mar 01, 2011

Croatian house prices stabilize after 2 year fall

Croatia annual house price change graph

Croatian house prices have stabilized, after mild but steady price falls since 2008.  The national price of advertised houses was slightly up (0.4%) in January 2011 from the previous month, but 3.8% down on the previous year, according to CentarNekretnina, the largest Croatian property portal.  January’s increase was the third consecutive monthly increase.

From the high point of September 2008, the national house price index had fallen by 11% to October 2010.

Property prices on the Adriatic Coast, Croatia’s most popular tourist destination, were more resilient.

  • The average price of seaside cottages and apartments was up by 0.2% from the previous month and down by a mere 0.3% from a year earlier, at €2,055 per sq. m. in January 2011.
  • The average price of houses was unchanged from last month and down only 0.7% from last year, at €1,564 per sq. m.
  • Apartments on the coast, however, have suffered.  The average price of Adriatic Coast flats was 11% down from the previous year, at €1,864 per sq. m. in January 2011.

In Zagreb:

  • The average price of flats was 2.3% down on a year earlier but up by 0.4% from the previous month, at €1,825 per sq. m. in January.
  • Zagreb house prices were 8.5% down from January 2010, but 4% up from the previous month at €1,163 per sq. m.

The following factors will negatively impact the housing market in 2011:

  • Weak economy, with GDP shrinking by 1.5% in 2010, following the severe 5.8% GDP contraction of 2009.
  • Slow implementation of economic recovery programs and reforms.
  • High levels of non-performing loans in the Croatian banking system (9.5% of all loans).
  • Heavy debt burdens. External debt, mainly in the private sector, is about 88% of GDP
  • High unemployment, at 19.6% in January 2011 - the highest unemployment rate for eight years, according to the Central Bureau of Statistics (CBS).
  • Unstable political climate following the resignation of Prime Minister Ivo Sanader in July 2009 and the looming elections in late 2011

House price movements

Croatia Average Price of Newly Built Dwellings graph

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 HRK11,252 (€1,514) per sq. m. from HRK8,939 (€1,203) 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%.

Foreigners love Croatia – but only the coast

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

Real estate is more actively traded in the Adriatic coastal areas 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 down!

Croatia Average Price of Newly Built Dwellings graph

During the War of Independence (1991-1995), dwelling completions dropped to less than 10,000 annually, from the previous annual 20,000-30,000 (1981-1990). The war also left a significant amount of the dwelling stock damaged.

The post-war period was equally challenging. 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. 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.

The number of dwellings completed rose to about 25,500 annually from 2007 to 2008.

However the recent downturn dampened enthusiasm for construction, and completions fell to 18,740 in 2009.  There were only 11,950 dwelling permits issued in Croatia during the year to November 2010, down from 24,585 permits in 2008.

Mortgage interest rates up!

Croatia housing loans graph

Interest rates on housing credits loans have been rising recently, to an average of 6.3% in 2010, despite record-low ECB rates.  Most mortgages in Croatia are variable rate, indexed to the euro (previously to the deutschemark) or Swiss Francs.

Commercial banks still dominate the housing finance market, though the building societies’ share of loans has increased from 1% in 2003 to 5% in 2010. But Croatia’s mortgage market has seen significant development 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, leading to better capitalization and more competition.

Croatia interest rates graph houses properties

As a result, the mortgage market grew from 4.7% of GDP in 2000 to 18% of GDP in 2010, as interest rates fell during the years to 2007. From 2002 to 2007, the amount of outstanding housing loans rose by 31% annually. However, due to the global crisis, outstanding housing loans grew by just 1.4% in 2009 and 7% in 2010.

Small rental market, moderate yields

Croatia inflation rate graph houses properties real estate

Croatia’s long-term rental market is very small, concentrating on short-term holiday rentals for foreigners and tourists. Long-term rental properties are concentrated in the metropolitan areas of Zagreb, Dubronik, and Split.

In Zagreb, a 120-sq. m. apartment rents for about HRK9,290 (€1,250) per month while a 200-sq. m. apartment has a monthly rent of HRK16,945 (€2,280).

Three-bedroom seaside flats located in the Adriatic Coast rent for about HRK8,919 (€1,200) per month. On the other hand, two-bedroom houses in the same area command around HRK13,378 (€1,800) per month.

Gross rental yields in Croatia’s capital, Zagreb, are moderate, at around 5.5% to 6.0%, according to a Global Property Guide research conducted in September 2010.  There is no particular connection between size of apartment and yields.

Economy continues to struggle

In the 4th quarter of 2010, the Croatian economy shrank 0.7% after recording a marginal growth of 0.2% in the 3rd quarter, according to the Croatian Bureau of Statistics.  In 2010, the economy contracted by 1.4%, after a 5.8% decline in 2009. Inflation is low at 1.9% in 2010, down from 6.1% in 2008.

In 2011, the economy is projected to grow by a modest 1.6%. 



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