Although Croatia is among European countries that the COVID-19 crisis has hit hardest, housing prices in the country continue to rise.

There are plenty of reasons for this. The real estate market is growing, interest rates are low, and there's an excess of cash in circulation. In such conditions, many people decide to solve their housing issues and invest in real estate, which, according to research, is perceived as the safest and most profitable investment in our society.

Subsidised housing loans, however, are also fueling the rise in housing prices.

Experts warn that part of the blame for rising housing prices lies with subsidised housing loans issued through the State Agency for Property Rights and Real Estate Transactions (APN). The high interest in APN loans, combined with short deadlines for purchasing real estate, are a major reason for high housing prices, particularly in Zagreb. In other words, state intervention in housing loans has only exacerbated an already high housing price trend.

"State subsidies for purchasing housing have sparked housing shortages, leading to inflated prices in Croatia, especially in Zagreb. Housing prices in Trešnjevci, for example, are higher than those in Graz, which is illogical and unsustainable considering our income levels. The state also bears some responsibility for this trend through its support models, including APN. This disrupts the market competition, creates market imbalances, and fosters renterism," says Index economic analyst Damir Novotny.

The goal of subsidised loans was to stop young people from leaving, but that hasn't happened.

Opereta owner Boro Vujović warns that the blame for high housing prices cannot be solely attributed to APN, even though subsidised loans do have a role in driving up housing prices.

"It all depends on your perspective. Someone who used the APN to solve their housing issue thinks the APN is good. But the question is what this model means for the entire market. When the APN's subsidised housing loan programme was launched, the aim was to stop young people from leaving. However, that didn't happen because staying in Croatia requires more than just a home – people also need a job and decent wages. The number of subsidised housing loans is limited, and the deadlines for purchasing a home are short, which benefits high prices because people don't have time to look for a home and negotiate the price. In other words, it's not just APN's fault, it's not a decisive factor, but it is certainly one of the reasons for rising housing prices," Vujović explains for Index.

Housing prices in new buildings in Zagreb rose by 9% last year, during the COVID-19 crisis.

According to the State Bureau of Statistics, the average price per square metre of new construction in Croatia last year was 12,724 kuna, which is 3.1% higher than in pre-crisis 2019. While housing prices in new buildings declined by 4.6% in the rest of the country over the same period and averaged 11,198 kuna, Zagreb saw a significant surge in new housing prices. Last year, a new home in the metropolis cost an average of 14,013 kuna, which is 9.2% higher than in 2019. This is largely due to APN's subsidised loans, most of which are used to buy homes in the capital.

There have been numerous cases of misuse of state subsidies.

The allocation of state subsidised loans has also been marred by misuse, as reported by the media over the past few years. There have been cases where beneficiaries of subsidised loans bought homes to resolve their housing issues, only to rent them out or convert them into apartments for tourists. The media have also exposed cases where young people received subsidised loans to buy homes from their parents or where children gifted their own homes to their parents, only to then apply for APN loans.

Societal consequences.

Croatia does not need to reinvent the wheel; it just needs to adopt a more sustainable housing model, one that does not disrupt market competition and fosters a culture of renterism. The EU's approach to affordable housing is more prudent, for instance, and encourages the construction of social housing. In Munich, for example, over 1,000 such apartments are built annually, and many other European cities also use this model. As Novotny points out, there's no need to build some sort of new welfare apartments, but rather to develop a housing model that addresses housing shortages in a sustainable way, as required by the EU. This requires regulating the grey market of rental properties and strengthening local government.

The APN's subsidised loan model is failing.

The APN's model, as it exists today, has outlived its usefulness. The time has come to reform or abolish it. The state has no reason to intervene in the real estate market, not even when it comes to social housing. The model in place promotes renterism and disrupts market competition, pushing housing prices higher. As Novotny argues, Croatia needs a new housing model, one that is financially sustainable, in line with EU practices, and addresses the needs of all citizens, not just those under 45.

APN needs to adapt and change.

Vujović believes that the APN's system of allocating subsidised housing loans is too centralised. People in Zagreb use these loans most, followed by those in Rijeka and Split, while the rest of the country is secondary. Vujović suggests decentralising funds to the county level, allowing each county to have its own APN. This would motivate people to buy homes outside of Zagreb and boost the market in other regions. By doing so, we would also ensure that housing prices are more evenly distributed throughout Croatia.

APN admits to preventing misuse.

Our inquiry to the APN resulted in a response that they have so far not received any reports of misuse of real estate purchased with subsidised loans. They've also stated that they're working to prevent misuse, which is why the Law on Subsidising was amended. The APN has received 18,024 applications for subsidised housing loans since 2017, of which 17,515 were approved, while 509 were rejected or not implemented. A new call for applications for APN subsidised housing loans has just been launched, with a budget of 50 million kuna. Eligible applicants are those under 45 who do not already own a home or apartment and will receive a minimum of 30% of their monthly housing loan repayments for at least five years.

We need a new housing model for our citizens.

Regardless of what happens to APN and the model of subsidised loans, it seems that the authorities – both the national and local governments – will have to rethink the way they address housing issues for citizens. Will they adopt a model similar to that used by developed European countries and their social housing, or will they significantly change the model of subsidised loans, or perhaps adopt a new approach? Time will tell. The politicians are expected to come up with concrete proposals.

Any new solutions must be financially sustainable and in line with EU practices and address the needs of all citizens, not just those under 45.

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