The real estate market in Croatia is experiencing further expansion with a trend of record-breaking price increases. We are currently in a seller’s market characterized by higher demand than supply, allowing sellers to dictate prices and conditions while buyers find themselves in a challenging position. According to the Portal Crozilla , the average asking prices for apartments in 2021 were 6.2% higher compared to 2020, 11.5% higher than in 2019, and 17.1% higher than in 2018. This situation of increased demand and rising prices for residential properties is not specific to Croatia but is happening in the majority of countries worldwide. Leading the pack are China (with a 5-year price growth of 111%), Hong Kong (94%), Israel (55%), Singapore (50%), Colombia (39%), Taiwan (30%), Canada (29%), and Norway (29%).
Several factors contribute to the increase in demand for properties and the subsequent price rise that we currently observe in Croatia.
What exactly influences the increase in demand for real estate and consequently the price increase?
- Record-low interest rates on housing loans.
- The State Housing Development Agency (APN) providing subsidized loans for young people up to 45 years old.
- The earthquake, which led to additional demand for apartments in safe new buildings.
- Inflation and low interest rates on savings, motivating people to invest their money from savings accounts in real estate.
- GDP growth and overall prosperity.
Growth of GDP and interest rates in 2022.
Croatian National Bank expects that the GDP growth rate in 2021 will be 10.8% compared to the pandemic-affected year of 2020. The growth of the Croatian economy in 2022 is projected to be 4.1%. If these predictions materialize without additional shocks due to the pandemic or any other crisis, real estate prices will continue to follow an upward trend, likely more moderate than in 2021. According to the announcements from the European Central Bank (ECB), interest rates will remain at the same level in 2022, which means that buyers will still be able to borrow for housing loans at favorable rates. This also means that people will withdraw their savings from banks, where the yield is around 0.02% to 0.05%, and invest in real estate, which offers annual yields ranging from 4% to 5%. Croatian citizens currently have 240 billion kuna in savings accounts, and it is expected that a portion of that money will flow into real estate because money in savings loses its value every day with such low interest rates and a 4% inflation rate.
Introduction of the Euro and Entry into Schengen
Croatia’s entry into the eurozone, with the official adoption of the euro as the currency, announced by the Croatian National Bank for January 1, 2023, as well as the entry into the European single economic area of the EU, known as the Schengen Area, during 2022, will result in simplified procedures, facilitating travel and business, thus positively impacting the overall economy and the number of real estate transactions. The coastal real estate market is expected to experience the greatest impact from the euro and Schengen.
New Round of APN Subsidies for Young People
The Ministry of Construction officially announced that APN subsidies for young families will continue until December 31, 2023. From 2017 to 2021, the call for applications was issued once a year, with an exception in 2020 when two calls were conducted. For 2022, one call is announced, likely in March. Undoubtedly, APN subsidies have been one of the causes of rising real estate prices in Croatia in recent years. While the APN system initially stimulated the real estate market, experts are debating whether it currently fulfills its objectives and whether it has become a negative factor in the market. Buyers have a deadline to apply for the call, and during that time, there is a sudden surge in demand and prices for properties in specific areas. Rising real estate prices also affect buyers who do not meet the criteria for APN applications and cannot benefit from its advantages.
Construction Costs
The past year has been marked by specific challenges in the construction sector. The increase in prices of raw materials and equipment (on average between 30% and 40% compared to 2020) due to disruptions in global supply chains, as well as high energy prices, have influenced the overall increase in real estate prices.
Expert predictions from the construction industry suggest that in 2022, existing prices of raw materials will persist along with high energy prices, and challenges related to labor shortages and other capacities for potential new projects will continue. Croatia has been approved funds from the European Union (National Recovery and Resilience Plan and EU funds for 2021-2027), and we can expect a significant reconstruction after the earthquakes in Zagreb and Petrinja, which will further strain the capacities of construction companies that are already insufficient for such a large undertaking.
The Most Expensive Price per Square Meter in Croatia – in Dubrovnik
Data from the Crozilla portal on average square meter prices in Croatia in 2021 show that the most expensive city in terms of price per square meter is the “Pearl of the Adriatic” – Dubrovnik, with an average price of 3,688 EUR/m2. It is followed by the “Queen of Tourism” – Opatija with 3,437 EUR/m2, Split with 3,063 EUR/m2, Zagreb with 2,271 EUR/m2, Pula with 1,870 EUR/m2, and Rijeka with 1,820 EUR/m2. The most sought-after cities for purchasing property are led by Zagreb, followed by Split, Rijeka, Pula, Osijek, and Zadar. In Zagreb, the demand for new construction has increased due to fear following the earthquake. Prices continue to rise, and new construction is being sold before it is even built. The prices of new construction in Zagreb vary from neighborhood to neighborhood. They range from 1,900 EUR/m2 for Sesvete, 2,000 EUR/m2 for Sv. Klara, 2,200 EUR/m2 for Špansko, Dubrava, and Lanište, 3,000 EUR/m2 for Trešnjevka and Jarun, 4,000 EUR for the micro-location of Petrova Street, all the way up to 8,000 EUR/m2 for attractive projects in the city center. Although to the layperson all new constructions may look the same, that is not the case, which is why it is important to check the creditworthiness of the developer, their references, and the equipment and materials being used.
Real Estate Bubble?
Considering all the aforementioned factors, the question arises as to whether this is a real estate bubble and if it will burst at some point. We all remember the real estate bubble in the United States that burst in 2008, causing the last major global crisis and recession. What exactly is a real estate bubble? The concept of a real estate bubble refers to the unjustified and rapid rise in property prices, followed by a sudden price collapse due to various factors, resulting in the market’s collapse. The basic principle of a real estate bubble lies in the fact that the value of properties is not linked to real circumstances such as development and population growth.
The Croatian National Bank subtly warned several times last year that a real estate bubble was inflating in the market.
Of course, there is a risk of a worst-case scenario occurring and the real estate market experiencing a sudden collapse. It is realistic to expect that at some point, supply will meet demand, inflation will cause an increase in interest rates, which will slow down demand. Thus, we would transition from the expansion phase we are currently in to the next phase of the real estate market, known as the increased supply phase, where demand declines and aligns with supply, and prices cease their upward trend. However, according to all indicators and projections, 2022 is expected to be another year of expansion.
Trends in 2022
Traditionally, in our region, people save “in bricks,” as evidenced by the new data from Eurostat, which shows that 91% of Croatian citizens live in properties they own, ranking us third in the EU after Romania and Slovakia. Low interest rates on savings, coupled with inflation, which causes the depreciation of money’s value, motivates buyers to invest in real (physical) assets that retain their value in such situations. For this reason, a large number of people choose to invest in real estate since most are not comfortable investing in stocks,
