House Price Index rose strongly
Lalaine C. Delmendo | February 26, 2022
Croatia's housing market remains buoyant, amidst low interest rates and robust economy. During the year to Q2 2022, the nationwide house price index rose strongly by 13.6% from a year earlier, up from a y-o-y increase of 6.48% in Q2 2021 and the highest growth recorded in recent history, according to the Croatian Bureau of Statistics (CBS). However in real terms, prices actually increased by just 1.39% over the same period, amidst surging inflation.On a quarterly basis, house prices increased 3.74% in Q2 2022, but declined 1.48% when adjusted for inflation.
By major regions:
- In Zagreb, Croatia's capital and largest city, new dwelling prices rose by 14.8% (2.45% inflation-adjusted) y-o-y in Q2 2022, according to the CBS. Quarter-on-quarter, prices increased 3.85% (-1.38% inflation-adjusted).
- In Adriatic Coast, prices of new dwellings increased 12.79% (0.66% inflation-adjusted) in Q2 2022 from a year earlier. On a quarterly basis, prices were up 2.88% (-2.3% inflation-adjusted) during the latest quarter.
- In other settlements, new dwelling prices surged 15.25% (2.86% inflation-adjusted) in Q2 2022 from a year ago, and by 6.41% (1.05% inflation-adjusted) from the previous quarter.
In 2021, the average price of new dwellings in Croatia rose by 7.8% to HRK 13,713 (€1,821) per square meter (sq. m.) from a year earlier, following y-o-y rises of 3.1% in 2020, 7.6% in 2019, 6.8% in 2018 and 7% in 2017. In Zagreb, house prices average HRK 14,672 (€1,948) per sq. m. while it was HRK 12,577 (€1,670) in other settlements.
Before the recent surge there was a long period of declining house prices - 2.13% in 2015, 1.44% in 2014, 1.68% in 2013 and 5.88% in 2012, according to the CBS.
Croatia's property market is expected to remain robust, primarily driven by strong demand and still limited supply.
The Croatian economy bounced back strongly last year, registering a real GDP growth rate of 10.2%, fully offsetting the 8.1% pandemic-induced contraction seen in 2020. Then in Q2 2022, the economy grew by 7.7% year-on-year, its fifth consecutive quarter of strong growth, buoyed by robust household consumption and a surge in exports.
The Croatian National Bank, in its Macroeconomic Development and Outlooks report in July 2022, projects the Croatian economy to expand by a healthy 5.5% this year, despite heightened global economic uncertainty and rising consumer prices.
Croatia is set to join the euro area on January 1, 2023.
Analysis
of Croatia Residential Property Market »
Croatia: reasonable prices, reasonable yields
How much can you earn? Gross rental yields in Croatia’s capital, Zagreb, are moderate to good, at around 5.4% to 6.0%.
In Split, rental returns are less good, with gross rental yields of 3.6% on larger apartments, 4.7% on smaller apartments
Round trip transaction costs are quite high in Croatia. See our property transaction costs analysis for Croatia and property transaction costs in Croatia, compared to the rest of Europe.
Effective tax rates are moderate in Croatia
Rental Income: Rental income, of nonresident foreigners is considered ordinary taxable income and is taxed at 12%.
Capital Gains: Capital gains are taxed at a flat withholding rate of 24%. Capital gains realized from properties held for more than three years are not subject to capital gains tax.
Inheritance: Theinheritance of the spouse and descendants are exempt from inheritance tax.
Residents: Personal income tax for residents is levied at progressive rates, from 24% to 36%.
Total transaction costs are high in Croatia
Total roundtrip transaction costs are high, ranging from 8.01% to 13.05% for old properties. The bulk of the cost is accounted for real estate agent's fees, at 3% to 6%, split between buyer and seller. The real estate transfer tax is 3% but does not apply to the first sale of new buildings. Instead, the sale of new buildings is subject to 25% VAT on the net construction value.
Croatian laws are neutral between landlord and tenant
Croatian law is neutral between landlord and tenant.
Rent: There is neither rent control nor a maximum deposit. One or two month’s deposit is customary.
Tenant Eviction: Evicting over-staying tenants can be difficult. Zagreb’s courts are clogged, and cases take time. Informal methods of using ‘agencies,’ i.e., thugs, are common and tend to be recommended by realtors.
Economy remains fundamentally strong, public finances improving
The Croatian economy bounced back strongly last year, registering a real GDP growth rate of 10.2%, fully offsetting the 8.1% contraction seen in 2020 due to the Covid-19 pandemic. Then in Q2 2022, the economy grew by 7.7% year-on-year, its fifth consecutive quarter of strong growth following a pandemic-induced recession, buoyed by robust household consumption and a surge in exports.The Croatian National Bank, in its Macroeconomic Development and Outlooks report in July 2022, projects the Croatian economy to expand by a healthy 5.5% this year, despite heightened global economic uncertainty and rising consumer prices.
“The economic fallout from the Russian invasion of Ukraine, accompanied by the leap in the prices of energy and raw materials and further disruptions in global supply chains, have had no serious impact on Croatia’s economic outlook so far,” said the central bank.
The European Commission has also recently upgraded its 2022 economic growth forecast for Croatia to 3.4%, due to strong domestic demand, investments and exports.
“Despite rising inflation, private consumption is expected grow solidly given the accumulated savings, favourable labour market developments and a strong tourist season,” said the European Commission. “Investments are expected to be backed by EU funds (both RRF and ESIF), with the public sector playing a leading role. Net exports are expected to also contribute positively, especially due to the strong tourist season, which – considering current bookings – is expected to surpass the 2019 record.”
From 2009 to 2014, Croatia’s economy lost more than 12% of GDP, Europe’s second-biggest contraction after Greece. 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.
Croatia’s economy began to turn around in 2015 and gained momentum in 2016, expanding by 2.4% and 3.5%, respectively. The country exited the EDP in June 2017. The economy grew by an annual average of 2.9% from 2017 to 2019.
The country’s budget deficit has fallen to a manageable 2.9% of GDP in 2021, a sharp improvement from the prior year’s 7.3% shortfall and below the 3% Maastricht threshold. The budget deficit is expected to fall slightly to 2.8% of GDP this year.
Public debt is also projected to fall to 76.2% of GDP this year, from 79.8% in 2021 and 87.3% in 2020, according to Prime Minister Andrej Plenković.
In July 2022, Fitch Ratings has upgraded Croatia’s long-term foreign-currency issuer default rating to ‘BBB+ from ‘BBB’, with a stable outlook, after the Council of the European Union officially confirmed Croatia’s accession to the euro area on January 1, 2023. S&P and Moody’s both followed suit, upgrading their credit ratings for Croatia from ‘BBB-/A-3’ to ‘BBB+/A-2’ and from Ba1 to Baa2, respectively.
In August 2022, overall inflation surged to 12.3%, sharply up from 3.1% a year earlier and the highest level in recent history. Inflation averaged 1.1% in 2011-21.
The labour market is also improving. Nationwide unemployment stood at 6.3% in August 2022, unchanged from the previous month but down from 7.2% a year earlier, according to the CBS. The country’s jobless rate averaged 14% in the past decade.