Croatia is a small and open economy highly exposed to external influences, specifically the impact of trade and financial flows from its major trading partners, Germany and Italy. Hence the popular saying “when Germany sneezes, Croatia catches a cold,” and considering that the US is the world’s largest economy and Germany’s biggest trading partner, we can extend it to “when the US sneezes, the world catches a cold.” We witnessed the effects of this during the last major economic crisis in Croatia. While most global economies emerged from the recession between 2010 and 2011, Croatia was among the last, only recovering in 2015 after six long years.
In the meantime, Croatia became a member of the European Union in 2013, and starting from January 1, 2023, it will join the Eurozone and the Schengen area. Generally, as an economy, we are more resilient to a new crisis than the unfortunate events of 2009, although there is regret that Croatian governments did not utilize the past seven years of growth to implement crucial structural reforms. Nevertheless, we are where we are, more stable and resilient. Additionally, a certain percentage of citizens and companies have learned from the aforementioned crisis, improving their balance sheets and increasing their savings.
Due to the energy crisis, the war in Ukraine, and the monetary response of central banks to high inflation rates, relevant economic analysts have been divided in recent months. Some predict a crisis of all crises for 2023 or early 2024, while others anticipate a mild and short-lived crisis. The question is no longer whether there will be a recession but rather when it will occur and how long it will last, and whether the global economies will float or dive.
The real estate market and GDP.
When we talk about the real estate market, the correlation is such that the real estate market and GDP are proportional. In the long term, the growth and decline trends of both cycles usually correspond to each other. Currently, the American and European central banks are tightening monetary policy to combat high inflation, which includes significantly raising interest rates, which is a major factor in slowing down the growth of the real estate industry.
In the United States, the current interest rate on mortgage loans is around 7 percent, twice as much as a year ago and the highest since April 2002. This means that someone who could afford a monthly payment of $1,800 for a 30-year loan a year ago could borrow $420,000 at that time, but today they can only get a loan of $280,000, which is 33 percent less.
Investment firm Goldman Sachs predicts that real estate prices will only drop by 3 percent in 2023, while credit rating agency Fitch Ratings predicts a decline of between 10 and 15 percent.
n Croatia, we are also witnessing an increase in interest rates on housing loans (interest rates are approaching 4 percent), although much milder than in the United States, both due to the slightly more lenient policy of the ECB compared to the Fed, and due to the benefits of our transition to the euro. Interest rates in Croatia will rise more slowly, partly due to the Croatian National Bank’s decision to reduce the reserve requirement rate and eliminate the minimum foreign exchange liquidity, which will increase the free monetary resources of commercial banks.
Trends from Western markets are coming to Croatia.
Although the structure of the American and Croatian real estate markets is different, there is a high probability that trends in the American and other Western markets will be reflected in the Croatian real estate market, but with some time lag, as it has been so far. Limited supply and high demand have driven property prices sky-high in recent years (prices in the United States increased by 30 percent from 2020 to 2022, while in Croatia prices have risen by 20 percent in the last two years). Another Croatian parachute alongside the Eurozone could be the Schengen area, which could continue to drive demand on the coast from Germans, Austrians, and Slovenians, but in the event of a more serious crisis, they will be the first to pull the investment brakes.
Nevertheless, data shows that price growth has finally started to slow down. Demand for real estate and prices have reached or are very close to their historical peak, and demand is equalizing with supply, moving towards a point of balance. After the previous phase of expansion, a new phase of the real estate market is approaching, called the phase of increased supply.
The new phase of the real estate market – increased supply
In theory, the phase of increased supply looks as follows. In the early stage, a large number of new properties enter the market as people feel that things are slowing down and want to monetize their property as soon as possible. There are fewer buyers because the availability of loans is reduced by raising interest rates, the expansion of companies slows down, and the number of jobs stops growing. Real estate listings on portals start to age and stay on the market longer and longer, 90 to 120 days or more. Prices start to decline, and sellers are willing to make more concessions as the market begins to favor buyers.
During the balance phase, investors, one by one, prioritizing those burdened by loans, are increasingly willing to make concessions and start lowering prices. New shopping centers have vacant spaces, and tourist facilities begin to offer additional discounts and promotions.
How to behave “by the book” in this phase?
It is not wise to be greedy. If you want to sell and gain capital, it is still a good time to do so. You may have to sell 5 to 10 percent below the current market value to ensure that you can complete the transaction before a flood of sellers inevitably drives the market down in the future. For those who want to buy property, this phase is a good time to purchase from distressed sellers and secure a price slightly below market value.
Historical graphs for the real estate market in the United States show that it takes an average of 2 years from the peak of expansion to the beginning of a recession, while it takes between 3 and 5 years from the peak of expansion to the bottom of a recession and the lowest prices.
