Residential Price Balloons Start to Deflate on Global Markets

The residential price hikes, which have been going on in global markets, have started to ease up due to the tightening of monetary policy. However, Croatia is still lagging behind, with a demand that far exceeds the supply, and it's not following the same trend. The prices of real estate have dipped the lowest in 13 years in New Zealand, in London, the prices of apartments have fallen by 11% compared to the previous records, which were set in August 2020, and there's been a sudden drop in the prices of luxury real estate from the west to the east coast of the US. Although it's expected that the increase in interest rates on loans will lead to a decrease in demand, and subsequently, the prices of real estate will start to fall, there are still no signs of this on the Croatian market.

Rising Prices

The recent Eurostat report on housing prices shows that they have risen by 10.5% in the first quarter of 2022 in the EU, which is the highest growth in 15 years. Croatia has even exceeded this average, with the prices of real estate rising by 13.5% in the first three months of the year, compared to the same period last year. The Czech Republic, Estonia, and Hungary have also seen significant price hikes, with the prices of real estate rising by 24.7%, 21%, and 20.6%, respectively. Although the second quarter was turbulent for the global economy due to the war in Ukraine, the energy crisis, the lockdown in China, and inflationary pressures, the data from the European Statistical Office will not be available until autumn. In the meantime, we've checked the current state on the ground with the ones who know it best - real estate agencies. "The prices are still not falling, the demand is still higher than the supply," said Adrijo Boro Vujovic, Director of Opereta Real Estate Agency, in an interview with Bloomberg. This year's APN (Agencija za Pravni Promet i Posredovanje Nekretninama - Agency for Legal Trade and Real Estate Mediation) competition for subsidized housing credits ended on April 22nd, and of the initial 50 million kuna worth of loans, 5,870 applications were submitted. By June 6th, 3,900 contracts were ready for negotiation, and 551 more were in the pipeline. By now, the APN has reviewed 5,400 requests. According to the Commentary on Monetary Liquidity in the Croatian National Bank, the highest monthly growth of residential credits in May was achieved since December 2011, when the data first started being recorded. This growth is a result of the credits issued within the state program for subsidized loans, according to the HNB. ~~251.1 billion kuna worth of total loans were issued in May, of which~~ 70.1 billion kuna were housing loans, a 1.3 billion kuna (or 1.9%) increase from March, and the highest growth rate of 9.3% for the year. The UK has also seen the biggest increase in residential loans in the past eight months, with British banks approving 66,163 housing loans worth around $9 billion (7.4 billion pounds) in May. The increase in interest rates, which will continue to be implemented to curb the biggest inflation in 40 years, will put an end to the boom in the residential market triggered by the pandemic. According to the Nationwide Building Society, which has predicted that the growth of residential loans will be the most significant in the UK, the market will start to slow down, and this will be evident in the decrease in the number of housing loans being issued. There are signs of a slowdown, the number of approved housing loans has decreased to pre-pandemic levels in April, and the research shows that the number of potential buyers has also decreased, said Robert Gardner, Chief Economist at Nationwide, in an interview with Bloomberg last June.

Foreign Investors

The demand for all types of homes in Croatia's capital is still extremely high, with demand exceeding supply, and the pre-war "old town" apartments, which were previously deemed unattractive even to their owners due to the devastating damage, have become sought-after properties again. This, of course, depends on the building's current condition and the price. The apartments in the older buildings in the city center have become popular again, and the price range varies greatly, depending on the condition and location of the property. Prices vary greatly, but we can estimate that the price of an old-town apartment is around 2,500 euros per square meter, said Adrij Boro Vujovic, Director of Opereta Real Estate Agency. While Croatian citizens are rushing to take advantage of the subsidized housing credits, the worsening economic situation and the increasing signs of a recession have made foreign investors more cautious about making significant investments. We've noticed a decrease in the number of foreign investors, particularly in the segment of commercial real estate, such as logistics centers and other business premises. Most of them have put their operations on hold, said Adrij Boro Vujovic, Director of Opereta Real Estate Agency.

Luxury Properties

On the other hand, foreign investors are still actively interested in buying luxury properties, which, despite the economic fluctuations that signal a recession, continue to increase in value. Marko Pažanin, Director and Partner at Croatia Sotheby's International Realty, believes that the prices of luxury properties are still rising, primarily due to the limited supply and high demand on the market. Currently, we're witnessing an increase in the value of luxury properties in Croatia, particularly due to the limited supply and high demand on the market. I'd like to emphasize that the most exclusive properties, with a view of the sea, have a permanent value, and the prices of these properties are not significantly affected by market fluctuations, said Marko Pažanin, Director and Partner at Croatia Sotheby's International Realty. One of the most exclusive properties on the market is Admiral's Residences, a 15th-century villa, once a summer residence of a Dubrovnik noble family. The prices of such properties are highly confidential, and Marko Pažanin emphasizes that the confidentiality of the property's owner is the most important aspect of the company. The biggest challenge for the companies that specialize in luxury properties is finding a property that meets the expectations of their clients. Pažanin believes that a significant portion of investors are still actively looking for a property that meets their requirements, so his company's brokers often search specifically for attractive properties on premium locations for their clients who are prepared to make a purchase promptly. When the seller agrees to the price suggested by the agency, the property is usually sold within six months. However, if the seller sets unreasonably high prices and tests the market, it can take a much longer time to sell the property, said Marko Pažanin, Director and Partner at Croatia Sotheby's International Realty.

Declining Prices

Each third buyer of real estate in Croatia is a foreigner, and in coastal towns, the percentage of foreigners exceeds 80%. Therefore, it's expected that if the global economic trends worsen, they will have a negative impact on the demand from foreign buyers, and subsequently, on the prices of real estate. This decline in demand, as it usually occurs, will also lead to a decline in the prices of real estate, commented Dubravko Ranilović, President of the Association of Real Estate Traders in the Croatian Chamber of Commerce, in a recent interview. Translated from Croatian content from Bloomberg at: hr.bloombergadria.com

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