Hrvatski
English
The most common two questions our clients and the media have been asking us over the past year are: 'Why have property prices risen so much over the last few years? When will the property prices drop?'
Let's start with the answers to the first question. Property prices have been rising over the last few years for several reasons. The fundamental one is the traditional approach of Croatian citizens to investment, with a preference for real estate, and minimal investment in other 'products.' Another key factor is the lack of supply due to insufficient housing production (the number of issued building permits in '23 was still about 20% lower than during the property market peak in the mid-2000s) and a focus on tourism, resulting in many properties for sale or long-term rent to be converted into apartments for tourist rental. Additionally, after years of crisis starting with the collapse of the real estate market in '08/'09, and a prolonged lack of quality projects, demand accumulated. Many other factors stimulated real estate purchases and investments, including low-interest rates on loans and savings, government housing loan subsidy programs contributing to price growth, and inflation in '21 and '22, encouraging investment in real estate as a hedge against currency depreciation. Finally, the introduction of the Euro, along with concerns about increased income source scrutiny and further price hikes, prompted additional investments in property.
It's essential to note that since the last quarter of '23 and the beginning of '24, we've observed a decrease in the number of transactions, even in the most active regions and market segments (9% nationwide, 22% in the city of Zagreb). This trend is typical in Croatia during a real estate market cycle change, where the number of transactions typically drops first, followed by a potential changes in prices. We have also noted a growing divergence between the listed and transactional property prices, indicating that the market has entered a new cycle.
However, expecting a significant drop in real estate prices (unless there's a new, dramatic, and unforeseen event, such as was the pandemic and is the escalation of the war in Europe) is not realistic. The rate of price growth or decline, and of the number of transactions, will depend to a lesser extent on macroeconomic factors in Croatia and our source markets. The most influential factor will continue to be the lack of supply.
It is estimated that we need at least 10,000 new flats annually, and until we see a significant increase in property supply, changes in real estate prices are unlikely. In the new construction segment, a price drop is not expected for now, but it remains to be seen if all developments will be absorbed at the prices currently set by developers, which will depend on the global geopolitical and local economic situation at their completion. In the used property segment, it would be important for many property owners to adjust their asking prices if they genuinely want to sell, as the pool of buyers willing, or able to purchase properties with characteristics that don't justify a high price, has diminished.
The continued focus on tourism will continue to negatively impact the real estate market, causing demographic problems in both the sales and rental segments, especially on the coast, where a high percentage of foreign buyers with greater purchasing power than the local population, continue to invest not only in second homes, but increasingly into apartments for rent to tourists. This has led to a shortage of long-term purchase and rental options for young families, students, and those unable to afford a purchase of property.
Housing affordability is becoming an increasingly significant challenge for a growing number of citizens. In '23, the supply of properties at average, let alone affordable, prices, decreased.
We need tax reforms that don't excessively favour tourist rentals and, more importantly, investments in infrastructure and various amenities outside major cities and tourist centers. A comprehenisve housing policy is also necessary, as leaving affordable housing provision to property owners and developers, who understandably aim for higher prices and margins, is not to be expected.
However, a comprehensive housing policy has not been enacted yet, and there have been no programs implemented to help citizens address their housing needs. Unfortunately, it is not expected that the housing affordability problem will be resolved in '24.