Croatian Property Tax: Remedy or Illusion?

Higher property taxes, lower real estate price growth. An analysis of 22 European countries shows a clear trend: the lower the share of property tax in GDP, the greater the increase in real estate prices since 2015. Croatia fits this pattern: with a property tax of 0.87 percent of GDP, prices have risen sharply (over 114 percent), which aligns with the trend that lower taxes accompany higher price increases.

Although there are exceptions, such as Germany, Austria, and Sweden with low taxes but modest price growth, or Portugal, Poland, and the Netherlands where prices rise despite higher tax burdens, the general pattern remains visible. In eight countries with lower taxes, prices have increased by more than 75 percent, while in eight countries with higher taxes, growth has remained below that threshold. The mentioned exceptions, of course, show that tax is not the only factor shaping the real estate market, but that demographics, credit, economic conditions, and local investment cycles also play an important role.

Another pattern is clearly visible in the analysis: countries with the fastest real estate price growth over the past decade are mostly transitional states in Central and Eastern Europe. Poland, Hungary, the Czech Republic, Slovakia, the Baltic states, Bulgaria, and Croatia have recorded growth between 80 and 150 percent, a result of a combination of strong credit expansion, urbanization, rising incomes and wages, and a lack of quality housing stock inherited from the socialist period. Since property taxes in these countries are among the lowest in Europe, the high price growth fits the tax logic, but also shows that broader structural and developmental factors strongly influence the market.

A similar pattern is being examined by American economists – additional insight into the relationship between taxes and real estate prices is provided by research from the Federal Reserve Bank of Minneapolis. The authors use a so-called tax capitalization model and test scenarios based on California and Texas. In the basic scenario, when the California tax increases from 0.8 to 2 percent, prices fall by 18 percent, and ownership of apartments increases by 4.6 percent (7.4 percent among those under 45 years old). In the extreme variant, where no new houses are built in California, prices still fall by 7.5 percent, and again more properties end up in the hands of younger families.

There are many similar studies on the topic of taxes and real estate prices. For example, a CSEF study conducted on a sample of 34 OECD countries from 1970 to 2014 provides strong empirical support for the thesis that property tax slows down the growth of real estate prices, while a study from Indiana shows that reducing taxes temporarily raises prices: in one year, they increased by about four percent after the tax was effectively reduced by 5.66 percentage points.

The Croatian property tax introduced this year, however, is merely symbolic compared to levels in California or Texas: 250 euros annually for a 50-square-meter apartment in Zagreb. Therefore, the question remains whether the tax can have an effect on real estate prices. As economist Josip Tica, a professor at the Faculty of Economics at the University of Zagreb, points out, the first effect of introducing property tax is usually an increase in the supply of rental apartments, as some owners decide to put their properties on the market after receiving their tax bills. In the second step, the increased supply may lower rental prices.

– The annual utility fee for a 50-square-meter apartment in Zagreb is less than 100 euros per year, and the new tax will amount to 250 euros. We will see in the near future whether this tax increase was sufficient, or whether the strategy was well calibrated – says Tica.

In theory, the introduction of property tax should reflect on real estate prices over a longer period, but since the Croatian market is quite driven by emotions rather than economic calculations, it is questionable whether this will happen here.

– People in Croatia do not buy apartments as an investment, but as security. They do not calculate the rate of return, so real estate is more in the realm of a pet than an income-generating instrument – Tica vividly explains.

The actual effects of the tax on the real estate market will also depend on how effective tax collection will be and how resourceful Croatians will be in trying to circumvent it. According to the forecasts presented so far, only 70 million euros are expected to be collected from this tax, and the Tax Administration has not yet provided specific figures on how many people will receive tax assessments. They responded that ‘exceptionally in 2025, the first assessments for determining property tax can be expected at the end of the third quarter, considering the deadlines established by law for the exchange of data necessary for determining the tax, or for determining exemptions from tax payment.