In today’s analysis, we’ll take a different look at inflation, through the lens of housing affordability.
Inflation, a prominent topic for over two years now, impacts individuals as well as the economy as a whole. Traditional inflation measuring through the CPI has its limitations, as it generalizes preferences from a sample of people. Today, we’ll look at inflation through the lens of housing affordability, and answer the question: “Has housing gotten less or more expensive in the last couple of years”?
To gauge this, we looked at Croatia’s average housing prices, and average net wages. When combined, we get the so-called affordability ratio. There are several ways to present this ratio, but here we adopted the following one: the average cost of a new 50 sqm apartment divided by the average annual net wages. This reveals the amount of savings needed to afford a new apartment.
Average new housing price per sqm, average net earnings in Croatia (2015 – H1 2023, EUR)
Source: DZS, InterCapital Research
In June 2023, the average net wage increased by 54.9% compared to 2015, reaching EUR 1,150, while the average new housing prices increased by 58%, reaching EUR 2,219 in H1 2023. This means that in 2015, a 50 sqm apartment cost app. EUR 70.2k, whereas in H1 2023, it cost EUR 110.9k. Over the same period, the average annual net wage increased from EUR 8.9k to EUR 13.5k in 2023.
Affordability ratio in Croatia (2015 – H1 2023)
Source: DZS, InterCapital Research
As of H1 2023, the affordability ratio stood at 8.2, meaning it takes around 8.2 average annual wages to buy a 50 sqm apartment. Historically, there was improved affordability before 2019, followed by the pandemic-related housing price growth slowdown in 2020 and 2021. However, a strong rebound in 2022 (20% YoY housing price growth), outpaced wage growth (7% YoY increase). This worsened affordability to 9 average annual wages in 2022. While there has been some improvement in 2023, the affordability ratio remains higher than pre-pandemic levels and all years except 2022, signifying a deterioration in affordability over the observed period.
One thing that also has to be taken into account, is the prevalence of the housing loans.
Croatian housing loans (EURbn)*, and housing loan interest rates** (%) (2015 – July 2023)
Source: HNB, InterCapital Research
*For the period 2015 – 2022, amounts refer to year-end amounts
**For the period 2015 – 2022, interest rates refer to yearly averages
In July 2023, the average housing interest rate amounted to 3.25%, a decrease of 1.90 p.p. compared to 2015. Housing interest rates were quite low during the last couple of years, incentivizing demand for housing loans. As such, the total housing loan amount increased to EUR 10.5bn in July 2023, an increase of 34% compared to 2015. Hypothetically speaking, if someone took a 20-year loan in 2015 for a 50 sqm apartment, they’d need over EUR 70.2k. Today, even with that lower interest rate, the amount needed is nearly EUR 111k, a EUR 40.7k difference in the base loan amount. Furthermore, in 2015, the monthly repayment amounted to app. EUR 594, representing 80% of the average monthly wage.
By July 2023, the monthly repayment for a new loan would amount to EUR 763, a 28% increase from 2015. Two things have to be pointed out here. Firstly, the total interest repaid did decrease compared to 2015 (EUR 40.1k vs. EUR 42.4k). Secondly, the share of the loan repayment in an average net wage also decreased. However, if we look at the developments of these factors over time, there were periods with lower monthly repayments and a smaller percentage of income dedicated to loan repayment, even with higher housing prices.
Housing loan repayment amounts (EUR), % of total net earnings (%) (2015 – July 2023)
Source: HNB, InterCapital Research
In summary, there are several key insights to be made here. Firstly, the fact that obtaining a loan for the same sized apartment in 2023 is EUR 40k more expensive than in 2015 is hard to justify. This is especially problematic due to two factors: firstly, the fact that the housing price growth outpaced wage growth during this period. Secondly, inflation occurred in other cost categories, such as food and energy. As such, relatively speaking, a lower amount of “free” disposable income would be available for loan repayment.
This ties in with the second insight. Due to the current macroeconomic and geopolitical environment, there is a higher risk involved, meaning that an increase in interest rates would be more detrimental than before, as higher absolute loan amounts are impacted a lot harder by the increase in interest rates. Unfortunately, given the fact that inflation is still above desired levels, so are interest rates to combat it. There is a likelihood that these high-interest rate levels will be maintained for some time and even a possibility of further interest rate hikes – both of which would lead to an increase in loan interest rates.
Finally, how does Croatia fare against other European countries in this regard?
Affordability ratio comparison between select European countries (Q1 2023*)
Source: National statistical offices of countries in question, InterCapital Research
*Latest data available for most countries
Out of the 20 observed countries, Croatia stands as the 7th most expensive. There are certainly outliers on both sides, with Slovakia, Lithuania, and the Czech Republic requiring 13, 11.4, and 11 average annual wages, respectively. On the other hand, Denmark, Ireland, Norway, and Belgium recorded affordability ratios between 3 and 5.5. Of course, this looks at country averages, and the prices in cities could end up a lot higher. An interesting observation can be made here. Countries considered more affordable according to this ratio, generally are so due to higher wages, rather than lower housing prices. For example, Denmark’s average net wage is over 2.1 times higher than Croatia’s, while its average housing price is “only” 42% more expensive. Even Slovenia, a regional peer, recorded better affordability not due to lower housing prices, but due to higher wages.
In the end, even though developments and changes in terms of the housing supply and price are welcome, the other side of the equation also has to be worked on. This would mean higher wages, which by itself would have to be driven by higher investments, productivity, and focus on value-adding industries. Even the ability to take higher loan amounts would be predicated on this.
To answer the question at the beginning of this blog: “Has housing gotten less or more expensive in the last couple of years”? the answer is multifaceted. Even though the affordability ratio shows us it hasn’t, in the current economic environment it would be hard to expect it to improve. Furthermore, the affordability did not deteriorate as strongly as in some other European countries. As such, it could be argued that despite all the challenges, “just enough” was done to mitigate the decline in affordability. However, as history teaches us, striving for “just enough” has never led a country to greatness.
