The Pandemic and the Croatian Real Estate Market

Šime Unić
The Pandemic and the Croatian Real Estate Market

While some have recently been wondering whether to sell their property, others have been asking themselves if it's the right time to buy real estate. At the very beginning of the pandemic, some experts had predicted that real estate prices were going to drastically drop. Did this really happen, though? 

The Effect of the Pandemic on the Real Estate Market

It’s undeniable that COVID-19 has had a significant effect on the economy, and thus on the real estate market. But what kind of effect exactly? 

According to the Croatian Bureau of Statistics, the pandemic has considerably slowed down the Croatian economy, beginning already in March of 2020. In the second quarter of 2020, Croatia experienced the largest real decline in GDP since 1995, and figures show that the crisis in 2020 was significantly worse than in 2008. In addition, it was difficult for experts on a global scale to predict whether a pandemic would lead to inflation or not because there were too many factors at play. 

But what about the real estate market? Many think that real estate is a stable investment and will remain so forever. Therefore, demand for real estate has not necessarily declined during the pandemic. After all, people always need a roof over their heads. 

In fact, it basically all comes down to supply and demand. Both before and during the pandemic, the demand for real estate is and was high, at least when it comes to city centers such as Split, Zadar, and Dubrovnik. This is largely due to population growth in general and precisely in these centers. 

the effect of the pandemic on the real estate market

Rising Real Estate Prices before the Pandemic

The rule is that the prices increase with increasing demand. So, real estate prices (those for sale as well as those for rent) rose drastically before the pandemic as a result of higher population influx. Demand was so high that new construction projects could not meet the demands of the market. 

Especially when it comes to coastal cities, tourism has largely contributed to population growth. In these cities, as well as in other larger city centers in Croatia, subsidies are received for the purchase of real estate, such as those of the APN (Croatia Real Estate Agency). In addition, in the first half of 2020, the real estate transfer tax was 25% lower than in the first half of 2019. 

There are already two factors at play. An increase in demand leads to an increase in prices. On top of that, those who sell real estate allow themselves to increase prices knowing that buyers will be willing to give more because they give less out of their own pocket and get more out of subsidies. Also, low interest rates on savings have prompted some to invest in real estate instead of saving money that can be paid off in the long run, at the very least by renting. 

There were no rules - the prices of new buildings grew (at least slightly), as well as those of older real estate, some of which had been on the market for a long time! 

rising real estate prices before the pandemic

The Current Situation of the Real Estate Market

Experts predict that this growth trend will not last forever. Although real estate prices will not necessarily fall, price growth will at least slow down. 

Prices are temporarily rising in all major cities. By far the most expensive real estate is in Dubrovnik where the price per square meter for apartments is on average € 3,800. The runner-up is Split with an average of € 3,000 per square meter for apartments. In Split, apartment prices at the end of 2020 increased by € 18 compared to the end of 2019. 

Although we are currently also experiencing a kind of crisis, it is different from the one in 2008 and therefore the price bubble in the real estate market should not repeat itself. The unemployment situation and the general economic situation in Croatia are simply not as unstable as they were then. 

Apartments in Zagreb

Since real estate prices vary the most in city centers, it is important to touch on changes in apartment prices in Zagreb as the largest city in Croatia. During the last crisis, real estate prices in Zagreb experienced the largest increase, but also the fastest decline. This time the situation is somewhat calmer. 

As experts predicted, Zagreb will be the first to see some market corrections because prices are not continuing to rise. This carries even more weight if we take into account the fact that the price of one square meter of an apartment in Zagreb increased by € 61 in just one year (from September 2019 to September 2020). The market is actually self-regulating. 

There are several factors that could have influenced this slow growth / stagnation of prices in Zagreb. Although the earthquake from March 22 of 2020 in Zagreb cannot be ignored and was devastating (materially and emotionally), experts do not link changes in real estate prices to the earthquake because the downward trend in prices began a few weeks before the shock. 

Another factor is reduced tourism in the city center. An increasing number of apartments that were rented out to tourists until recently are now appearing for sale on the real estate market. Now, when there are no tourists, people are forced to manage and repay the loans they took out in order to renovate or even buy those expensive apartments in the city center. 

Thus, supply in Zagreb is gradually catching up with demand, which will ultimately lead to a stabilization of real estate prices, or at least a slowdown in their growth when it comes to larger city centers. Again, the biggest shifts in prices in Zagreb will be seen in the center itself, which, as a more densely populated part of the city, certainly took a bigger blow during the pandemic. 

apartments in zagreb

Conclusion and Predictions

The initial impression of a drastic drop in property prices was largely due to absurdly inflated real estate prices just before the pandemic. When prices had started to fall at least a little, it was a shock, so the impression was that they were falling significantly more than they actually were. But the situation is becoming clearer and experts predict price stabilization in the coming months. 

However, the correction will take a little longer, possibly up to a couple of years. During this period, the requested and achieved real estate prices will balance out. 

In the long run, largely due to the projected decline in population, real estate prices are also predicted to decline gradually over time, especially those of older buildings. It looks like 2021 will bring some stability, at least in terms of real estate market prices. 

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