Tax on empty flats and housing policy have become actual topics on the Croatian real estate market, which are once again fueling heated debates. About flats, housing prices, and other aspects of the Croatian real estate market, Lider conducted an interview with Borna Vujović

Recently published data show a decline in real estate transactions. What is the extent of this decline and which region of Croatia is most pronounced?

- Our data show that the decline in real estate transactions was around 20% compared to the same period last year. The most pronounced decline was recorded in Zagreb, where the main reason was the absence of the housing credit subsidy program (APN credits) that was present in the spring of last year. The decline in transactions is particularly visible in March and April, while the market stabilized in May and June.

Despite the decline in real estate transactions, there was no decline in their prices. Some even predict further growth. Why is the Croatian real estate market so sluggish and contradicts economic logic? Is it not logical that in the event of a decline in demand and sales, prices should also decline?

- The best example of a market not always following economic logic was during the 2009 economic crisis, when the decline in real estate transactions occurred, while prices only began to decline a year later, namely on our market, this decline lasted until 2015. We are not in a similar situation for a number of reasons. Despite the decline in real estate transactions, there was no drastic decline in prices, while several countries have seen minor corrections in prices. Why is this best shown by the example of our investor who recently completed a building in Istria and sold 25% of the flats, while for a similar project, just over a year earlier, before the permit was issued, all the flats were sold. Investors think in a way that they will rather wait for the property to reach the price they set, as the market shows that it is the money that loses value due to inflation, while the value of the property grows from year to year. In this way, they can wait as most investors build with their own funds, they do not squeeze the banks, and a part of the invested funds can be returned through tourist rentals, until the property is sold at the desired price. Considering the construction costs and time for a new project, these are significantly higher and longer than for a project completed a year and a half ago. In addition, investors in Croatia listen to other markets, such as Germany and Austria, which is why they also temporarily suspend further projects. We are a small market, dependent on internal processes and the economy. If the tourist season were to significantly decline, this could affect the decline in prices, as a good part of property owners are credit-encumbered and a poor season would lead to problems with mortgage repayment, and they might be forced to put their property on the market at a lower price. In addition, it should not be forgotten that there is a renovation of properties due to the earthquake, which generates significant revenues for the construction industry, a small number of employees, tourism as a BDP generator, as well as the fact that we are part of the eurozone.

Often, there is talk about the high prices demanded by sellers and that the requested prices are higher than real. We are thinking mainly about used properties or new ones. What correction of the market is needed to revive the sales?

- When talking about unrealistic demands regarding property prices, it generally refers to used properties. The market correction needed to revive sales depends on many factors, such as supply and demand, the economic situation, interest rates, etc. It is necessary to take a closer look at the situation on the real estate market and analyze trends to precisely assess what correction should be made. Our data show that property owners sometimes have unrealistic expectations, and a correction of the requested prices is needed. The data we have suggest that it is not realistic to expect a decline in realized prices, but rather the prices requested.

Despite the annual growth in the number of apartments, i.e. private tourist accommodations, sales do not follow demand, and initiatives against touristification of the coast are increasingly common. How do you look at all this from the perspective of a real estate agency?

- From the perspective of a real estate agency, we believe that it is essential to have a clear development strategy and understand the direction in which we want to go as a tourist country. A significant part of real estate transactions is generated by private investors who buy properties with the intention of renting them out. Instead of restrictive measures, we advocate for incentive measures that would help solve the problem of housing. It is essential to plan construction so that it corresponds to the capacity of the infrastructure and maintains a balance between tourist development and the quality of life of the local population.

At the same time, in Zagreb, the adoption of the new GUP is being discussed, which is met with a negative reaction by investors as it increases green areas. Can you comment on the new Zagreb GUP?

- My impression is that the new GUP aims to reduce the over-urbanization of certain areas, which I support. However, it is essential to consider the need for new residential spaces. Large restrictions can lead to a decrease in supply, which may result in a rise in prices. It is necessary to balance all factors to ensure the sustainable development of the City, which includes increasing green areas, but also meeting the housing needs of the population.

Regarding the Zagreb GUP, there is talk about reducing available areas for construction. However, on the other hand, the number of issued building permits has been in decline since 2008. Why is it not built more and increase the supply? Or we will never reach the levels of construction from the pre-crisis period? Maybe such a large supply is not even needed, considering that Croatia has lost 400,000 inhabitants, and demographic projections are still dark. Even Zagreb, at least according to the 2021 census, lost some of its population.

- A large part of the investors who worked until 2008 never returned to the market due to losses from the previous cycle. A significant generator of construction in the previous cycle were banks that "distributed credit" without a great selection, which led to a large number of unsold flats in Zagreb, according to some estimates, up to 10,000 unsold flats. The number of issued permits decreased until 2017, when a new cycle began, but under different conditions. In the new cycle, the most sought-after properties are those with good locations, developed infrastructure, and proximity to amenities, which is not the case with many properties. Banks now require investors to have land with a construction permit, 30% of their own funds, and sold between 20% and 30% of the properties. These are conditions that are not easily met, especially since Croatia has lost some of its population. On the other hand, foreigners are moving to Croatia, with estimates suggesting between 150,000 and 200,000 foreign workers. All of them need somewhere to live, and many bring families, which creates demand for new housing. In addition, our coast is a popular second-home destination for many citizens of other countries in the European Union, and the question is when this will also become the case for Zagreb, given that the distance from Zagreb to the sea is just over an hour, which, globally, is a city by the sea.

Why are the projects Gredelj, Heinzl, and other large areas owned by the City not put into operation? Where does it stumble? Are there any possible public-private partnerships? Could these projects bring new construction spaces, which might be more cost-effective for the City of Zagreb than communal provision of distant suburbs that are emerging on the outskirts of Zagreb?

- When it comes to project Gredelj, the main problem is the ownership status, which is divided between the City and the state. This area represents an ideal space for new flats with already developed infrastructure. We are hoping that progress will soon be made in resolving this issue, as Gredelj has the potential to become a new center of Zagreb. In the end, the wise use of existing urban spaces can provide long-term benefits for urban development and the quality of life in Zagreb.

How do you view the problem of unaffordable housing and what are the possibilities of its solution? The APN was unsuccessful. Now, there is increasingly talk about preferential renting. What is the solution?

- The problem of unaffordable housing is complex and requires a multifaceted approach. The housing credit subsidy program was not successful, which suggests the need for new solutions. Preferential renting is one of the possible solutions, but with wisely established rules. It is essential to solve the problem of unaffordable housing through an integrated approach that takes into account the specific needs of the local population.

There are 50,000 empty flats in Zagreb, a number that has recently become quite prominent. Can anything be done about these flats, to put them on the market? Is a tax on empty properties, similar to the one in Canada, a possible solution? Or should it only be introduced in larger cities?

- In order to introduce a serious tax on properties, the state needs to carry out a number of serious preparations, from resolving the land registry issues onward. The "first-wave" solution of taxing vacation homes is unlikely to achieve the desired effect. Those who own many properties will find ways to avoid the tax while those who own properties that are not used will be unfairly burdened. On the other hand, a well-prepared tax on empty properties could encourage owners to sell or rent their properties. With just 10% of the estimated 50,000 empty flats in Zagreb appearing on the market, it would have a significant impact on the overall supply and prices. If I were to be asked, I would increase the tax on tourist rentals, which is currently paid as a flat fee, at least to the level of the income tax. I believe it should be tied to the rental period, with longer rentals paying more.

How can we avoid the situation of false declarations of residence and the avoidance of tax on empty properties? Or can this be controlled through the consumption of electricity and other utilities?

- Up to the point where the figure communicated in the media was reached, we arrived at it through the HEP and control of non-turning meters, which could certainly be one of the ways to control properties. Generally, we are known for our creativity in finding alternatives, so I am not sure if there are any ways to prevent certain tricks.

When we talk about empty properties and the tax on them, one of the arguments against it is that it would affect the middle class. Do the owners of empty properties actually belong to the middle class? What difficulties would there be in implementing such a tax?

- Properties are our greatest wealth, and we own them in this amount due to the purchase of social flats. We are not financially literate enough, so we usually don't invest in other things, but our properties are our only choice. Even when buying properties, we had to pay income tax or capital gains tax to have the money for the purchase. When buying, we also had to pay property transfer tax or VAT, and now we would have to pay another tax. We need to consider the fact that some properties are empty for a reason, such as earthquake damage or unresolved property issues, and are not safe for living.

What is your stance on the tax on properties, and if it is introduced, how should it be conceived – on the second property, by value, on unused properties...

- A property tax program must be well thought out and based on a detailed analysis of the real estate market and soci-economic conditions in Croatia. The tax on properties can be a useful tool for regulating the market and ensuring a more just taxation system, but only if it is properly designed and implemented. However, it is essential to consider that introducing a tax on properties as part of the tax reform would relieve the income tax burden. Introducing a tax on properties without addressing the soci-economic issues would be just another tax burden. To implement a property tax, we need several key steps such as land registry cleaning. It is crucial to have precise data on property ownership and value for a fair application of the tax. We need to understand the dynamics of the real estate market, including supply and demand, price trends, and regional differences. In the end, the introduction of a property tax should be part of a broader strategy to resolve the housing problem. It should include incentive measures for construction, rental subsidies, and support for social housing. Only in this way will the property tax contribute to a fair and sustainable housing system.

According to the HNB data, in seven coastal counties, 13,632 apartments/flats were sold in 2022, while foreigners purchased 4,284 apartments/flats throughout Croatia. The vast majority of these transactions are concentrated in the coastal real estate (around 90% of foreign purchases are in the Adriatic region), so it can be concluded that foreigners buy every fourth apartment on the coast. What is the current situation with foreign purchases? Has interest declined due to the rise in interest rates?

- In the Adriatic region, the decline in transactions was most pronounced due to the economic crisis in Austria and Germany, the countries from which a large number of buyers come. This trend is particularly noticeable in Istria. It is essential to note that foreigners in our country usually buy properties with their own funds, so the rise in interest rates is not the primary reason for the decline in transactions. However, the situation on real estate markets in Western Europe is stagnant, which automatically affects our market. The smaller interest in buying properties on the Adriatic coast is connected to the general uncertainty and economic difficulties in the countries of the buyers, which affects their willingness to invest in properties in Croatia.

The question of unauthorized construction is filled with media headlines, but it is systematically not resolved. What is your stance on this, and how can it effectively be resolved?

- First of all, strict implementation of laws and regulations is essential. It is necessary to ensure that laws on construction are consistently applied and that unauthorized construction is not tolerated. Regular and thorough inspections of construction sites are required. We had two rounds of legalization that allowed the legalization of all existing properties by June 21, 2011, which helped to put a large number of properties into the legal market. One of the reasons why some apartments are not on the market is their illegality. I believe that abandoning the deadline for submitting requests for legalization would be a wise decision, which would allow everyone who has not submitted a request, but built their property before the deadline, to legalize their property. I would also abolish the discounts on fines for legalization, and increase them in counties with high development indexes, and reduce them in counties with low development indexes. Thus, a certain social justice would be achieved.

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