Although real estate prices continued to grow for several years in the first quarter of this year, they will slow down by the end of the year, and in the next period they could stagnate or fall, CNB analysts estimate in the latest publication "Financial Stability".

The reasons for this are the negative consequences of the pandemic on economic growth, increased uncertainty in terms of job security and income, a marked decline in activity in the real estate market, as well as an increased tendency to invest in more liquid and secure assets.

The average growth rate last year was nine percent and was among the highest in the EU. The large increase in prices in recent years was particularly pronounced in Zagreb and the Adriatic, where they reached pre-crisis levels. Compared to 2015, prices in Zagreb increased by about 37 percent, and in the Adriatic by about 20 percent. Referring to the indicators of deviations of real estate prices from macroeconomic fundamentals at the end of 2019, the CNB states that they indicated a "slight overestimation".

Tourist demand

As major disruptions did not follow until the end of the first quarter, there were still no significant price changes. However, at the end of the first and for most of the second quarter, the corona crisis and earthquake in Zagreb almost froze the sale of real estate. According to the CNB, real estate prices in the next period could be negatively affected by the expectation that short-term renters will face problems in repaying debts due to the possible lack of tourist demand.

- This could also affect the growth of the supply of apartments and potentially contribute to the fall in real estate prices - says the analysis of the CNB.

The length of the crisis

The movement of real estate prices in Zagreb, on the other hand, will inevitably be affected by the consequences of the earthquake, "which could increase the demand for newer and better quality real estate, so we can expect price stratification according to these criteria." In addition, depending on the duration of the crisis at the global level, foreign demand for domestic real estate, especially those in the Adriatic, could decrease.

When it comes to market supply and demand, the number of purchase and sale transactions, despite rising prices, was significantly lower last year than before the previous crisis, with two thirds of total transactions in Zagreb and the Adriatic. After the introduction of epidemiological measures, the majority of activities in the real estate market related to the implementation of previously contracted transactions, such as the state program of subsidizing housing loans, which significantly affected the demand and prices of apartments and houses.

Among other things, during the last call in April, APN received 3681 new applications for state aid. Over the past three years, as part of the subsidy program, as many as a quarter of total transactions were realized, with market activity growing significantly in the months of program implementation. In addition to the subsidy program, the growth of real estate prices in recent years, according to the CNB, was influenced by other factors. In addition to historically low-interest rates on housing loans, demand has also been driven by favourable labour market trends, as well as positive consumer expectations about the profitability of real estate investments.

Low-interest rates

In addition, prices on the Adriatic and in Zagreb were strongly influenced by tourist trends, ie daily and weekly rents. In conditions of low-interest rates on deposits, as well as the negative experiences of many investors in the capital market, the excess funds were often directed to the real estate market. A positive impetus to the rise in prices was given by the amendment to the Real Estate Sales Tax Act, which reduced the rate from four to three percent. Finally, the supply of residential real estate adjusted relatively slowly to the increased demand, which is confirmed by the trends in the volume of construction works and issued building permits.