Croatian Property Market at Risk of Collapse? EU Sends Warning to Country

By 14 February 2022

February the 14th, 2022 - Could the Croatian property market be at risk of collapse? It seems so, as with a handful of other countries to whom the European Union (EU) has sent out warnings.

As Poslovni Dnevnik writes, the aforementioned EU warnings were sent to Croatia, Hungary, Liechtenstein and Slovakia. In addition, recommendations were sent to Germany and Austria after they both failed to meet the requirements of the ESRB from back in 2016 and 2019, as reported by Index.

“Financial stability risks related to residential the property market continued to grow in the context of macroeconomic risks associated with the coronavirus pandemic and the continued strong dynamics of the property market, housing loans and household indebtedness. The key vulnerabilities highlighted in the ESRB's assessment are medium-term in nature and relate to the rapid rise in property prices and the possible overvaluation of residential real estate, the level and dynamics of household indebtedness, the growth of housing loans and signs of easing lending standards,'' it was said,

A special warning for Croatia in regard to the Croatian property market notes that "after a long period of correction and subdued growth, real property price growth accelerated to 8% year on year back in early 2019."

"According to the estimates of the Croatian National Bank (CNB/HNB), property prices are increasingly deviating from their long-term basis. This is influenced by a number of supply and demand factors. First of all, in some regions, a significant part of the demand for housing comes from foreigners (about 10% in total). While total transaction activity was lower after the outbreak of the coronavirus pandemic, the share of foreign buyers remained at pre-crisis levels.

Secondly, Croatia suffered two earthquakes back in 2020, both of them hitting the Zagreb region and causing significant property damage. These events revealed some shortcomings in the quality of standards of the housing built before the 1960s. As a result, fewer apartments were advertised for sale, potentially leading to higher overall price levels. At the same time, the gradual reconstruction of damaged housing, the cost of which is estimated at 23% of gross domestic product (GDP) in 2020, could increase house prices through greater construction activity.

Finally, back in 2020, the Croatian Government extended the housing subsidy scheme, which has now been in force since the end of 2017, and provides higher subsidy rates in less developed regions for the purchase of the first real estate,'' the warning about the Croatian property market reads.

Although only about half of housing transactions are financed through loans, according to the ESRB, real growth in mortgage lending accelerated back during the second half of 2019, and especially during 2020. It averaged approximately 7.5% between January and August 2021.

“To some extent, this dynamic has been driven by the state housing subsidy system, with an increase in the share of subsidised loans from 18% in 2019 to 35% in 2020. Many new loans have been state-subsidised loans. In addition, in the first half of 2021, in the case of some new loans, the maturity exceeded 30 years. In June 2021, the share of mortgage loans represented about 12% of the real estate market in Croatia,'' it has been stated.

“At the same time, household indebtedness in Croatia is relatively low compared to other EU countries. During 2020, loans to households increased in real terms, but at lower rates than loans to apartments. This was the result of a decline in general consumer confidence, while government subsidy schemes for housing maintained a high level of demand for real estate,'' it added.

The EU has since called for the adoption of measures that would prevent "an increase in household indebtedness, ie state subsidies for housing loans."

Finally, the ESRB states that there is "potential for serious negative consequences for the economy" in Croatia in regard to the Croatian property market and its risks.

"The ESRB believes that the key problems are the rapid growth of retail loans and the overestimation of real estate prices due to the lack of explicit measures that could mitigate the risks associated with residential real estate and the real estate sector," as reported by Index.

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