Croatia's housing market is recovering, along with its economy
May 30, 2017
Yet since 2015 Croatia's economy has been growing - after a deep recession lasting 6 years - and growth will inevitably strengthen its housing markets. A recovery of prices is already taking place in Zagreb, and the coming years should see a broad local property market recovery.
- The Adriatic coast's house price index rose by 0.9% (0.7% inflation-adjusted) during 2016. This price rise followed annual price y-o-y increases of 1.8% in Q3, 1.9% in Q2, and 0.8% in Q1 2016, based on the figures from the Croatian Bureau of Statistics CBS.
- In Zagreb city house prices, in general, have been rising for the last three quarters. In Q4 2016, house prices in Zagreb city were up by almost 2% y-o-y (1.8% inflation-adjusted), following y-o-y growth of 2.1% in Q3, and 0.1% in Q2 2016. However the average price of new dwellings in Zagreb sharply dropped by 11.5% (-11.6% inflation-adjusted) y-o-y to HRK 10,445 (€1,396.31) per sq. m., suggesting that there is still an overhang of new homes.
- The nationwide house price index for existing dwellings increased by 1.8% y-o-y (1.6% inflation-adjusted) In Q4 2016, while the national house price index for new dwellings dropped by 4.7% y-o-y (-4.9% inflation-adjusted).
Croatia's star property performers are coastal regions like Šibenik-Knin County (4.2% up y-o-y to €1,650 per sq. m.), Istria County (3.13% up y-o-y to €1,577 per sq. m.), and Lika-Senj County (1.94% up y-o-y to €1,169 per sq. m.). The Dalmatian coastal resort town of Split had the highest annual house price growth among Croatia's large cities during the year to January 2017, rising 5.81% to an average apartment price of €2,334 per sq. m., according to the property portal Njuškalo. The most expensive properties can be found in Dubrovnik (€3,349 per sq. m.), followed by the coastal resort town of Opatija (€3,113 per sq. m.) and the tourist island of Hvar (€2,850 per sq. m.).
Međimurje County - the nation's smallest and richest region, which borders Slovenia - is a rare case of inland county that has recorded an annual price recovery, with apartment prices rising by 1.66% y-o-y to an average of €689 per sq. m.
Croatia’s property market has been depressed since the global financial crisis hit the country’s tourism-oriented economy.
- In 2009, the national property price index fell 4.99% y-o-y (-7% inflation-adjusted)
- In 2010, the national property price index fell 6.33% (-7.46% inflation-adjusted)
- In 2011, the national property price index slightly rose 0.18% (-2% inflation-adjusted)
- In 2012, the national property price index fell 1.57% (-5.2% inflation-adjusted)
- In 2013, the national property price index fell 3.95% (-5.65% inflation-adjusted)
- In 2014, the national property price index fell 1.57% (-1.21% inflation-adjusted)
- In 2015, the national property price index fell 2.9% (-2.56% inflation-adjusted)
- In 2016 the property market started to recover, with the national property price index increasing by 0.89% (1.91% inflation-adjusted). Sales totaled around 2,791 dwelling units sold, up from 1,700 units in 2015, according to the Croatian Bureau of Statistics (CBS).
From 2009 to 2014, Croatia's economy lost more than 12% of GDP, Europe’s second-biggest contraction after Greece. The economy contracted in 2009 by 7.4%, in 2010 by 1.7%, in 2011 by 0.3%, in 2012 by 2.2%, in 2013 by 1.1%, and in 2014 by 0.5%, according to the Croatian National Bank (CNB).
Croatia's economy began to turn around in 2015 and gained momentum in 2016, with estimated growth of 2.9%, according to the Croatian Bureau of Statistics (CBS,. following a 1.6% economic recovery in 2015. During the year to Q4 2016, the economy expanded by 3.4%. The economy is predicted to accelerate further in 2017, according to the CNB and the European Commission (EC). The EC also noted that the government's expansionary fiscal stance will also aid in driving economic growth this year.
In January 1, 2017, Croatia implemented lower real estate transfer tax from 5% to 4%, while on VAT-charged property transactions, the VAT rate remains at 25%. In the second half of the year, the government is expected to subsidize half of first time buyers' loan installments for at least four years.
Croatia: reasonable prices, reasonable yields
How much can you earn? Gross rental yields in Croatia’s capital, Zagreb, are moderate to good, at around 5.4% to 6.0%.
In Split, rental returns are less good, with gross rental yields of 3.6% on larger apartments, 4.7% on smaller apartments
Round trip transaction costs are quite high in Croatia. See our property transaction costs analysis for Croatia and property transaction costs in Croatia, compared to the rest of Europe.
Effective tax rates are moderate in Croatia
Rental Income: Rental income, of nonresident foreigners is considered ordinary taxable income and is taxed at 12%.
Capital Gains: Capital gains are taxed at a flat withholding rate of 25%. Capital gains realized from properties held for more than three years are not subject to capital gains tax.
Inheritance: Theinheritance of the spouse and descendants are exempt from inheritance tax.
Residents: Personal income tax for residents is levied at progressive rates, from 12% to 40%.
Total transaction costs are high in Croatia
Total roundtrip transaction costs are high, ranging from 10% to 15% for old properties. The bulk of the cost is accounted for real estate agent’s fees, at 3% to 6%, split between buyer and seller. The real estate transfer tax is 5% but does not apply to the first sale of new buildings. Instead, the sale is subject to 25% VAT on the net construction value.
Croatian laws are neutral between landlord and tenant
Croatian law is neutral between landlord and tenant.
Rent: There is neither rent control nor a maximum deposit. One or two month’s deposit is customary.
Tenant Eviction: Evicting over-staying tenants can be difficult. Zagreb’s courts are clogged, and cases take time. Informal methods of using ‘agencies,’ i.e., thugs, are common and tend to be recommended by realtors.
Economic growth expected to continue in 2017During the year to Q4 2016, the economy expanded by 3.4%. The Croatian economy is predicted to accelerate further in 2017, according to the CNB and the European Commission (EC). The EC also noted that the government's expansionary fiscal stance will also aid in driving economic growth this year.
Croatia’s most serious problem is high unemployment, the fourth highest in the EU, following Greece, Spain and Cyprus. However, the numbers have substantially dropped, according to the Eurostat. Based on Eurostat's data, Croatia is one of the EU member countries with the largest unemployment declines in February 2017. In March 2017, unemployment rate was at 14.4%, down from 17.2% in the previous year, according to the CBS.
In March 2017, Croatia's annual inflation stood at 1.1%, according to the CNB, after rates of -1.1% in 2016, -0.5% in 2015, and -0.2% in 2014. The CNB expects the inflation to rise to 1.6% in 2017, mainly due to the inflationary pressures of imported goods, as well as the expected rise in the prices of crude oil and raw materials.
In a parliamentary election held on September 11, 2016, the conservative party Croatian Democratic Union (HDZ) was victorious, winning 61 seats, still below the 76 seats needed for a parliamentary majority. The Social Democratic Party (SDP), the leading centre-left party and HDZ's rival, came second and won 54 seats.
HDZ leader, Andrej Plenković, assumed office as the country's new Prime Minister in October 2016, succeeding Tihomir Orešković, who served as Croatia's Prime Minister for only less than a year. Prime Minister Plenković has promised a "Europe-oriented" government, and formed a coalition with the Bridge of Independent Lists (MOST) in October 2016.
In March 2016, Moody’s Investors Service downgraded Croatia’s credit rating from Ba1 to Ba2, with negative outlook. Moody's negative outlook was revised to stable in March 2017, due to a reversal in the upward trajectory of public sector debt, and stronger economic growth.
Unlike other new European Union members, which experienced an economic boost after their accession, Croatia joined the EU on July 1, 2013 when the EU was struggling. Since the beginning of 2014, Croatia has been in the European Commission’s Excessive Deficit Procedure (EDP) due to its high budget deficits and public debt. But the country’s budget deficit was cut to 1.8% of GDP in 2016, down from 3.3% of GDP in 2015, and 5.4% of GDP in 2014, according to the European Commission. The country’s public debt was 84.1% of GDP in 2016, down from 86.7% of GDP in 2015. In 2017, Croatia's budget deficit is expected to rise again to 2.1% of GDP due to the new government's tax reforms, but is expected to drop again to 1.8% of GDP in 2018.