House prices in Croatia continue to rise, while demand remains higher than supply. According to the latest Eurostat data, house prices in Croatia increased by 13.5% in the first three months of this year compared to the same period last year, which is above the European average. Despite warnings that the real estate market is already feeling the slowdown in Europe, experts say that Croatia has not yet experienced this, and we can expect a rise in interest rates on loans According to data from the State Bureau of Statistics (DZS), in the first quarter of 2022, compared to the last quarter of 2021, house prices rose by 6.5% in Zagreb, 3.3% on the Adriatic, and 6.4% in the rest of Croatia. If we looked at annual growth, i.e. in relation to the first quarter of 2021, the growth was even higher, at 16% for Zagreb, 11% for the Adriatic, and 14% for the rest of Croatia. In addition to inflation, which is reflected in the price of building materials and energy, the price is primarily determined by the relationship between supply and demand. "On the supply side, it's the amount of new construction and renovation offered on the market, while on the demand side, the impact is made by employment, wages, credit conditions, and interest rates. In the long run, an important factor in demand is demography, i.e. the change in the number of inhabitants," explains Ivan Laljak, a senior advisor in the real estate company Colliers.

The slowdown of the market

Despite indications of a slowdown in the real estate market in some European developed countries, Laljak says that we still do not see concrete evidence of this in Croatia. Trends from the financial and real estate markets typically arrive in Croatia with a certain delay compared to the developed markets of Western Europe, but each market has its own specifics. Laljak says that the interest rates on loans will rise, only the extent to which is the question, which may result in a slowdown of the real estate market. "The European Central Bank raised its reference interest rates for the first time in 11 years in July, and a similar policy is expected to continue. There is no decisive impact from the entry into the Eurozone, as interest rates would rise in any case. The introduction of the euro may have a positive effect on reducing interest rates through the elimination of exchange rate risk, etc., although this impact will not prevail due to other circumstances," Laljak explains. "If a recession occurs, as is being talked about, it must affect the real estate market, which is closely linked to all economic and social events and changes; when there is a positive economic situation, so does the real estate market react. It is realistic to expect that the trend of rising prices will be stopped, which was this year's maximum; prices have risen by 13-15% in the past year, which is a record growth, so I think that the announced recession will lead to a decrease in the trend of price growth. Whether it will turn around, it is difficult to predict at the moment," says Boro Vujović, a real estate market expert and director of OPERETE.

Foreign buyers on the coast, locals in Zagreb

Demand for residential properties remains high, while the supply is limited. Laljak notes that, in addition to the population that buys real estate to solve their primary residence, a part of the demand comes from foreign buyers and Croatian diaspora, mostly related to Zagreb and The Adriatic. In addition, investors buy real estate for short-term or long-term rental, and as a protection against inflation. Vujović confirms this. "The real estate market is functioning normally at the moment. There are no changes in the period from 1 to 15 August, but the market in Zagreb is also quite active. There are more foreign buyers on the coast. Consider that 30% of purchases/sales are carried out by foreigners, and in that part, 100% is related to the coast, while in Zagreb, locals are mostly buying," Vujović notes, adding that demand remains higher than supply, especially for quality and new properties. One of the reasons for the high activity of the market on the Adriatic is that there has been a strong interest of foreign buyers (non-residents) in residential properties for a longer period, Laljak explains. The highest demand comes from citizens of Germany, Austria, and Slovenia. "The share of foreign citizens in the total number of buyers of residential properties is the highest in the northern coastal counties because they are geographically closer to the mentioned countries and are quickly and easily accessible by personal vehicles. In 2021, foreigners accounted for 40% of all transactions for residential properties in Istria, 29% in Primorsko-Goranska County, 26% in Zadar County, 22% in Šibenik-Knin County, 21% in Lika-Senj County, 20% in Dubrovnik-Neretva County, and 16% in Split-Dalmatia County. We expect this trend to continue to increase in the future," Laljak says.
Stabilization of building material prices
The prices of building materials have stabilized, which should have a positive impact on the continuation of construction projects. Despite the stabilization of prices, Laljak emphasizes that the situation is still volatile, and it is difficult to predict what will happen in the short term. "On the global markets, aluminum, steel, wood, and lead have fallen by more than 30% from their highest levels in the late stages of last year and early this year. Although further stabilization is expected, if the geopolitical situation worsens and there are problems in the supply chains, it is possible to see the rise in prices of materials again. As for supply, despite the increased construction activity in recent years, it is still significantly below the pre-global financial crisis 2008 and 2009. For example, if we look at the issued construction permits, in 2021, in relation to 2007, there were issued 8,200 fewer permits," Laljak says.
Purchase of real estate in the near future
The decision to buy real estate is one of the most important financial decisions in life, which depends on circumstances and needs, financial situation, plans for relocation, and market conditions on a particular micro-market. Therefore, Laljak says that each person should carefully assess their own situation and needs; how urgent it is, what are the differences in rent and interest rates for loans, what are the expectations for the growth of wages/salary in the future, and what are the potential conditions for lending that an individual may receive. "If someone is in a hurry, and they can agree on a fixed interest rate for a certain period, it's better for them to buy real estate now rather than waiting a few more months, because the question is what interest rates will be like later on, and how will the banks adjust the loan conditions," Vujović says.

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