Black, Realistic and Optimistic – Three Scenarios for the Croatian Housing Market

The intensity of economic recovery, disposable income of the population, demographic trends, and the degree of utilization of EU funds are some of the most important variables that will affect the realization of a pessimistic, realistic, or optimistic scenario for the Croatian housing market by 2027, according to an analysis by Raiffeisenbank Austria (RBA).

RBA analysts in the latest publication RBAnalyses “Housing Market” consider indicators that represent the most significant factors in the movement of demand for residential real estate: demographic trends, an overview of the most significant macroeconomic indicators, i.e., the state and prospects of the economy, the supply of housing loans, and the movement of interest rates as well as government policies.

Depending on the future movement of these factors, an optimistic, pessimistic, and realistic scenario for the housing market is possible in the coming years.

Black Scenario – Pressure on Average Price Decline

The pessimistic scenario predicts further intensification of already present negative demographic trends, which would negatively reflect on the real estate market.

“With a further decline in the working-age population and the absence of sustainable economic growth in the medium term, economic migration of younger working-age population would intensify and thus further threaten the demand for residential real estate. On an illiquid housing market under pressure from an oversupply of low-quality properties in less attractive locations, further pressure on the decline of average prices would be created,” the analysis states.

According to this, the darkest scenario, by 2018, real estate prices would fall by up to 10 percent after which the decline in the period from 2019 to 2021 would ease to 5 percent, followed by a slight price increase by 2027.

The average rate of price decline over the entire period from 2016 to 2027 in this “dark mode” would amount to about 2 percent.

Likewise, insufficient economic growth would negatively reflect on the labor market through a low employment rate, and thus on the reduction of disposable income, while in the case of increased external vulnerability and unpredictable shocks in financial markets, such as, for example, the weakening of the kuna against the euro, the financial accessibility of real estate would also decrease.

Realistic Scenario – Gradual Recovery and Slight Price Increase

The realistic scenario primarily implies the stabilization of negative demographic indicators in conditions of initiated economic recovery and more intensive withdrawal of funds from EU funds.

According to this scenario, with the recovery of the real sector, employment and real disposable income would increase, and further loosening of credit conditions and greater supply of loans in the domestic currency would reduce potential currency risks and increase the population’s inclination towards long-term borrowing.

RBA analysts state that a positive impetus for stimulating activity in the real estate market in the medium term could come from the legal regulation of property valuation, along with the formation of a database on purchase prices at the national level.

They estimate that the introduction of a unified property tax would simplify and make the taxation process more transparent.

“This year’s slight increase in average prices of sold new apartments could continue reflecting the beginning of the recovery of demand for residential real estate. The realistic scenario predicts a gradual slight increase in residential real estate prices at an average rate of 4 percent from 2016 to 2027,” the analysis states.

Optimistic Scenario – Stronger Economic Growth and Dynamic Price Increase

In the case of the optimistic scenario, all indicators affecting demand, whether short-term or long-term, have particularly positive values.

In this case, unexpected economic growth based on growth and employment in the real sector, a strong inflow of foreign direct investments, and significant utilization of EU funds would result in an increase in household disposable income, thus encouraging long-term investments in residential real estate.

“With increased interest from foreign nationals in purchasing real estate in Croatia, prices would adjust to higher levels, which would open a new cycle of construction and supply of apartments in the medium term. Therefore, this scenario implies a more dynamic price increase during the projection period at an average rate of 11 percent from 2016 to 2027,” the analysis concludes.