Croatian Housing Market Misfires

Reports from property portal CentarNekretnina and the Croatian Bureau of Statistics show that Croatia’s housing market continues in freefall as prices and building permit applications plunge. The country’s …

Reports from property portal CentarNekretnina and the Croatian Bureau of Statistics show that Croatia’s housing market continues in freefall as prices and building permit applications plunge. The country’s real estate prices have been falling for the last four years and 2012’s 3.1% overall drop stemming from declines in every major geographic location. Prices in the capital of Zagreb are down along with prices along the country’s Adriatic Coast, its most popular tourist destination. Experts blame Croatia’s atrophied economy, which has only been exacerbated by financial fallout in the Eurozone. For more on this continue reading the following article from Global Property Guide

The housing market in Croatia remains depressed, amidst deteriorating economic conditions.

In Zagreb, the capital, the average asking price of flats was down by 4.6% in December 2012 from a year earlier, at €1,665 per square metre (sq. m.), according to CentarNekretnina, the largest Croatian property portal.

The Adriatic Coast, Croatia’s most popular tourist destination, saw a steeper year-on-year decline, with the average price of flats falling by 8.1% during the year to December 2012, at €1,671 per sq. m.

House prices fell in most districts, with Maksimir registering the biggest year-on-year house price decline of 8.5% in December 2012.

The most expensive apartments are in the upper town of Medvešcak, with an average price of €2,310 per sq. m. in December 2012, followed by the Center, with an average apartment price of €2,086 per sq. m.

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

  • In 2009, the national property price index dropped 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 dropped by 1.3% (-3.3% in real terms)
  • In 2012, the national property price index fell by 3.1%

For the first three quarters of 2012, the total number of residential building permits plunged by 46% to 2,443 from the same period in the previous year, according to the Croatian Bureau of Statistics.

The Croatian property market is expected to remain down in 2013, according to local real estate experts. In fact a new property tax, which was intended to take effect on April 1, 2013, could exacerbate the already grim situation. The new property tax of 1.5% would be applied on 70% of the property’s estimated value, according to Finance Minister Slavko Linic.

The property market has been adversely affected by the country’s stagnating economy and the Eurozone sovereign debt crisis. Croatia’s economy is estimated to have contracted by around 1.5% in 2012, after annual declines of 0.01% in 2011, 1.4% in 2010, and 6.9% in 2009, according to the International Monetary Fund (IMF).

House price movements

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%.

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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!

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!

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.

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’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.

Prolonged recession, high unemployment

Croatia’s economy expanded by an average of 4.6% from 2000-2007, but growth slowed to 2.1% in 2008 due to the global financial crisis.  In 2009 Croatia fell into recession and its economy contracted by 6.9%. The economy shrank by 1.4% in 2010 and by another 0.01% in 2011. In the third quarter of 2012, real GDP declined by 1.9% from a year earlier, as consumption, investment and industrial production fell amid the ongoing eurozone debt crisis, according to the Croatian Bureau of Statistics.

The country is now struggling to emerge from a renewed recession, after the economy contracted in the past four quarters.

Real GDP is expected to have fallen by 1.5% in 2012, amidst unfavourable external conditions and subdued domestic demand, according to the IMF. Standard & Poor’s (S&P) is even more skeptical, which estimated that the Croatian economy has contracted by 2% in 2012 and will stagnate in 2013.

In mid-December 2012, S&P cut Croatia’s sovereign debt rating to junk, citing the country’s structural and fiscal overhaul as insufficient to promote economic growth and render public finances sustainable.

In November 2012, consumer prices rose by 4.4% from a year ago. The country’s annual inflation rate was 2.3% in 2011, from 1% in 2010, 2.4% in 2009 and 6.1% in 2008, according to the IMF.

The country’s budget deficit was about 6.2% of GDP in 2011, the highest level in the past 8 years.

Croatia’s most serious problem is its very high unemployment. In October 2012, unemployment rate reached a record 19.6%. From 2010 to 2011, the average unemployment rate in Croatia was 12.95% per year, up from an average of 8.9% from 2007 to 2009.

Croatia is now due to join the European Union in July 1, 2013, provided that all 27 member states ratify accession. EU membership is expected to bring foreign investment and stronger economic growth. Croatia’ GDP per capita is currently at 61% of the EU average.

This article was republished with permission from Global Property Guide.


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