In today’s blog, we briefly cover the construction sector in Croatia, an industry well known to most Croats and a frequent topic in the media. It is an area that attracts government focus and public debate, remaining one of the key drivers of the Croatian economy.

Historically, the Croatian construction sector has carried a significant weight in the domestic economy, acting both as a driver of GDP growth and as a foundation for other activities such as infrastructure, tourism, commercial real estate, and office development. The sector reached its peak before the 2008 financial crisis, after which it entered a prolonged slowdown. The recovery was gradual and uneven, but momentum started to build again after the pandemic, supported by public investments and private demand.

Looking at the most recent data, construction accounted for 6.43% of Croatia’s GDP in 2024 at current prices. In 2025, the sector’s footprint expanded further, contributing 7.8% of Q1 GDP and 6.8% of Q2 GDP, which averages to 7.3% in the first half of the year. This places the industry close to the levels recorded in the strongest cycles of the past.

At the same time, the sector has increasingly become a sensitive and often controversial topic in Croatia. It is a field where economic interests, political decisions and social debates intersect. Rising housing prices, regulatory changes and government interventions regularly keep construction in the headlines, underlining both its importance and its contentious nature.

Let’s look at some graphs. This graph shows the volumes of construction works and puts into perspective the YoY changes in cumulative works when compared to the same periods of the previous year. When viewed cumulatively, the picture is clearer than on a month by month basis, as it smooths out short term fluctuations and highlights longer term momentum. From 11M 2015 up until today the total volume has stayed in positive territory, which means that for almost ten years construction activity has consistently increased compared to the same period of the previous year, only with varying intensity. The largest jumps can be observed at the start of 2019 and again at the beginning of 2024, followed by a slight correction in the most recent months, while civil engineering works have slipped into negative territory but not enough to pull the overall volume down.

Volume of construction works indices (6M 2015 – 6M 2025, YoY, %)

Source: DZS, InterCapital Research

With the increasing volume of construction works, the value of completed construction projects also rose, although with a slight delay. Moderate growth was visible until 2022, when the completion of infrastructure projects initiated in earlier years began to contribute more strongly to the overall value. This can be attributed to several factors, including reconstruction after the earthquake which created strong demand against slower supply, Croatia’s entry into the eurozone which encouraged larger projects with higher standards, as well as a significant wage increase in recent years supported by solid GDP growth. Among these drivers it is also important to note that households accumulated more deposits, which increased their appetite to invest, while the construction boom itself was visible in the sheer demand for concrete purchases in recent years. As household incomes grew, the income and substitution effect allowed for higher spending, which naturally lifted the value of construction projects, a trend that is in line with the continuous increase in volumes we already noted over the past ten years. In numbers, the value of completed works increased by 5.3% in H1 2025 compared to H1 2024, following a sharp 14% increase in 2024 versus 2023.

Value of completed construction works (Q2 2015 – Q2 2025, EURm)

Source: DZS, InterCapital Research

Several other indicators should also be considered, most notably the number of issued building permits, which spiked at the end of 2022 and the beginning of 2023. In 2015, the total number of permits stood at 6,328, rising to 11,564 in 2023 and 11,823 in 2024, while in the first seven months of 2025 it reached 6,889. This points to a moderate but still solid pipeline of construction activity in the short term. The expected value of these works followed the same trajectory, increasing from EUR 2,77bn in 2015 to EUR 7,02bn in 2023, then to EUR 7,54bn in 2024, while in the first seven months of 2025 it already amounted to EUR 4,13bn.

Building permits issued and the expected value of these works (Jan 2015 – Jul 2025, EURm)

Source: DZS, InterCapital Research

Looking at the supply side, the Croatian construction sector has long faced challenges related to a shortage of workers, driven by wage pressures from higher paying countries such as Austria and Germany, as well as a mismatch between education and labor market needs. In the short term this issue has been partly offset by the import of foreign workers.

Since the pandemic, material costs have surged under the pressure of inflation, elevated public spending, supply chain disruptions, geopolitical tensions and all the other factors we already mentioned in earlier sections. All previous graphs effectively lead us to this point, showing the trend and the correlation between higher volumes, stronger demand and rising costs. To put things into perspective, from Q2 2015 to Q2 2020 construction costs per m² rose by only 10%, a figure that seems almost impossible today. From Q2 2020 until Q2 2025 the increase amounted to 59.5%, a lot isn’t it? It was driven by higher wages, stricter building standards, abundant capital inflows, eurozone membership, the need to invest savings, and even a social effect where one household’s decision to build or renovate stimulates others to follow.

In the latest data, costs per m² fell by 1.17% in Q2 2025 compared to the previous quarter, the first decline since Q1 2023, bringing the level to EUR 1,608 per m².

Construction costs per m² (Q1 2015 – Q2 2025, EUR)

Source: DZS, InterCapital Research

On the other hand, strong demand has also been a major factor behind the sector’s expansion. It stems from several sources, including post earthquake reconstruction, infrastructure development and maintenance, new tourism related projects, commercial real estate, and naturally the steady flow of new residential construction.

In the case of residential buildings, it is important to note that in Croatia they are not perceived only as places to live but also as a store of value and an attractive investment. This mindset is visible among both domestic buyers and foreign investors.

Average prices of new dwellings sold per m² (H1 2015 – H1 2024, EUR)

Source: DZS, InterCapital Research

As can be seen in the last graph, the average price of new dwellings in Croatia reached EUR 2,754 per m² in H1 2025. In Zagreb the level is somewhat higher at EUR 2,958 per m², while in other settlements it stands at EUR 2,511 per m². Looking back over the past ten years, this represents an increase of 81.4% for Croatia as a whole during the analyzed period.

Somebody can say, That is not fair, but look at the cost side, construction expenses per m² rose by 74% in the same period, which partly explains the surge in prices, but certainly does not take away from the fact that the increase is substantial.

To conclude, rising material and labor costs together with resilient demand for real estate are expected to persist, although likely at a slower pace in the coming years. Croatia has experienced nearly a decade of uninterrupted growth in construction volumes, rising project values, and sharp increases in both costs and dwelling prices, a dynamic that supported GDP but also worsened affordability, especially for younger households. Addressing these pressures requires structural reforms in areas such as construction regulation, urban planning, transportation, tax policy and housing supply, which remain underdeveloped or too often shaped by populist measures. Without such changes, the sector risks entering a cycle where costs and prices growth continue to outpace wages and deposits growth, keeping real estate out of reach for a growing part of the population.