House prices have skyrocketed, especially in Zagreb and by the sea, and new incentives for the growth of prices were given by subsidies for mortgage loans.

In the real estate market in Croatia, a trend is noticeable that even the prices of houses that have been on the market for a long time, in some cases more than a year, are increasing, contrary to logic. Dalibor Dobrić asked experts for DW what is happening (the text is published with the permission of the author in full): Facing a new round of subsidies for mortgage loans, house prices have unexpectedly begun to rise further, especially in the Zagreb market and by the sea. Prices of used houses on certain locations are reaching those of new apartments, despite the fact that the latter have also risen. >> Subsidies have increased house prices, when is the right time to buy If one looks at house prices in detail, a trend becomes apparent that even the prices of houses that have been on the market for a long time, in some cases more than a year, are increasing, contrary to logic, and the prices in the ads vary depending on which agency put them out.

What drives price growth

What drives prices to rise rapidly? One reason is certainly state intervention. The subsidies are granted in a very short period, so buyers agree to prices that "eat up" a larger part of the subsidy. However, there is also a positive economic situation, and low interest rates on savings, which is why people transfer their savings to real estate. Boro Vujović, the owner of the Zagreb agency Opereta and deputy president of the Croatian Chamber of Commerce of Real Estate, states that the current economic situation is one of the reasons for the price increase, as it is motivating people to invest more in real estate. “The psychology of the Croatian people is to save in instalments, we are not used to investing in gold, shares, bonds,” he says, adding that people are thinking about their future, in which it is uncertain whether there will be pensions. Housing that is rented out always generates income.

No one likes to lose

However, what sometimes causes even drastic increases in prices, in some cases for houses that haven't found a buyer for months, and now approach the prices of new apartments, is the fact that many Croatian people are stuck in real estate. They cannot convert the value of the house into liquid cash, and the money invested in the house is being preserved but not multiplied, explains Nikola Erceg, assistant at the Department of Psychology at Zagreb's Faculty of Philosophy, who co-leads the module of Consumer Behaviour Psychology with professor Zvonimir Galić. From a psychological standpoint, the reasons for behavior that leads to increasing house prices come from the "aversion to loss", says Erceg. "Namely, people are much more affected by the amount of money they will lose (for example, if they don't sell the house at a price they set themselves, people feel they lose money), rather than the joy of gaining the same amount of money. Simply, people do not like to lose, and in the context of selling houses, people risk higher prices and the impossibility of selling the house just to avoid the feeling of loss, even though that loss is subjective (in relation to what they had estimated) and not objective (in relation to the objective price of the house)." Furthermore, people are often neglecting "the game with risk" associated with this behavior (i.e. failing to sell the house, or failing to convert it into liquid cash): what is the real cost of this behavior, and could that money have been invested profitably in the meantime?

That which is ours is more valuable

Another phenomenon, Erceg continues, is social comparison. "We are social beings, and we are mostly informed about important aspects of our survival and success in life by people around us. People are extremely inclined to draw conclusions about their status or situation by comparing themselves to others. It is not surprising that people then set the prices of their houses based on how other people valued theirs, and this creates an inflationary bubble of prices." And why do some people overprice their houses? Erceg suggests a third interesting phenomenon, the "effect of ownership". This is related to the fact that people value something more if they own it than if they don't. "The effect of ownership is best illustrated by a study that used mugs. Half of the people participating in the study were given a simply ordinary mug as a gift, while the other half were not. Their task was to simply estimate the value of the mug, and those who had received a mug estimated its value twice as highly as those who did not."

Stabilization expected

And how long will this situation be on the market? Boro Vujović from Opereta says it cannot last much longer. There won't be a market crash like in 2008, when the bubble burst, Vujović says. “This time it won't be like 2008 and 2009. The situation now is different, there's no crisis, no unemployment, banks have set the criteria for lending and people are not borrowing 100 percent of the price as they did before...The situation will smoothen out, stabilize, and there might be some minor correction, maybe some slowing down of the rise, but there won't be a crash.” He notes that even the serious investors in the real estate market, the ones known as "sophisticated investors", are not expecting further price growth, but rather stability. Vujović even says that some sort of correction has already started in Zagreb. "Apartments in the city center that were bought for short-term rentals to tourists are now starting to appear on the market, because the offer is too big. That will lead to the stabilization of apartment prices in the city center, for both renting and buying," he believes. The irrational behavior and setting of high prices is, according to Vujović, the result of greed. "They will regret it later, 'I could have sold it, why didn't I?', some will say, just like they did after 2008," Vujović concludes for DW. Source: prijaplani.hr

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