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.
According to the flash estimate released on Friday, the Croatian CPI increased by 6.6% YoY, and 0.4% MoM in September 2023.
On Friday, the Croatian Bureau of Statistics released the latest flash estimate of the Croatian CPI, for the month of September 2023. According to the estimate, the Croatian CPI grew by 6.6% YoY, and 0.4% MoM. Even though this might seem like a decrease on a YoY basis, this would come from the higher base in the same month last year, rather than the genuine slowdown in price growth. The continued MoM increase (0.4% MoM this month, 0.6% MoM last month) means that inflation growth is far from over.
Croatian CPI YoY growth (February 2013 – September 2023, %)
Source: Croatian Bureau of Statistics, InterCapital Research
According to the main components of the index, on a YoY basis, Food, beverages, and tobacco growth is estimated at 9.6%, followed by Services at 6.9%, Non-food industrial products without energy at 4.6%, and Energy, at 3.9%. On a monthly basis, the largest increase was recorded in Non-food industrial products without energy, at 2.4%, and Energy, at 1.5%. On the other hand, Services decreased by 1% MoM, while food, beverages, and tobacco declined by 0.6%. In terms of the harmonized index of consumer prices (HICP), on a YoY basis, an increase of 7.3% was recorded, while on the other hand, on a MoM basis, a decrease of 0.7% was recorded. It should be noted that the difference between HICP and CPI is that CPI refers to spending by only domestic, private households in a given country, while the HICP also takes into account spending by foreigners. Also, HICP can be used to compare to other European countries, unlike the CPI.
Comparison of HICP growth with available European countries (September 2023, YoY, %)
Source: Eurostat, InterCapital Research
On a YoY basis, the largest increase in HICP was recorded by Slovakia, at 8.9%, followed by Croatia at 7.3%, and Slovenia at 7.1%. On the other hand, the lowest HICP was recorded by the Netherlands, at -0.3% YoY, followed by Belgium at 0.7%, Greece at 2.4%, and Finland, at 3%. In the entire Euro area, the growth amounted to 4.3% YoY.
Comparison of HICP growth with available European countries (August 2023, MoM, %)
Source: Eurostat, InterCapital Research
On an MoM basis, the largest increase was recorded by Greece, at 1.9%, followed by Italy at 1.7%, Austria at 1%, and Portugal at 0.8%. On the other hand, Netherlands and Malta recorded decreases of 0.8%, each, respectively, followed by Croatia at 0.7%, and France at 0.6%. In the entire Euro area, the growth amounted to 0.3% MoM.
Taking all of this together, the inflation growth it seems is far from over in Croatia. The decrease in HICP MoM vs. CPI MoM could be attributed exactly to the tourism industry, as August is the most prominent month with the most arrivals and overnight stays, and thus on average highest service prices. As such, a decrease in the MoM HICP is expected, as fewer foreign tourists are present to contribute to inflation growth. The CPI MoM, however, is one that is really troubling. With the coming of winter, and the possibility of higher energy (especially oil and gas), and electricity prices, a return of inflation to desirable levels would be hard to achieve. Of course, the Croatian government has already stated its willingness and plans to help those in need, both companies and individuals. This should help with the inflationary pressures they face, but would also come at a cost of increasing the amount of money in circulation. This is especially important, as an increase in the amount of money in circulation is the opposite of what the ECB’s current restrictive monetary policy (which increases interest rates) is trying to achieve.
According to the latest release by the Slovenian Statistical Office, the CPI in September 2023 grew by 7.5% YoY (vs. 6.2% YoY the previous month!), and 0.3% MoM.
With the end of September, many EU countries have released their CPI estimates for the month, including Croatia and Slovenia. In this article, we’ll review the changes in Slovenia. According to the press release by the Slovenian Statistical Office, the CPI grew by 7.5% YoY, and 0.3% MoM. Breaking this down further, services on average grew by 8.4% YoY, followed by goods at 7%. In the goods category, non-durable goods recorded growth of 8.8%, semi-durable goods of 5.5%, and durable goods of 1%.
In terms of the impact on the annual inflation, 1.6 p.p. came from the 9.2% higher prices of food and non-alcoholic beverages, 0.9 p.p. from 26.5% higher prices of electricity as a result of the elimination of the measure of reduced payment of contributions. Further, higher prices of recreation and culture, increasing by 7.8% contributed 0.8 p.p. The prices of goods and services in the health group grew by 10.7%, while Restaurants and hotels grew by 9.2% YoY in September. On the other hand, by 18.6% cheaper liquid fuels eased the annual inflation by 0.3 p.p.
Moving on to the monthly change, higher prices of electricity (+10% MoM!) added 0.4 p.p. to the monthly inflation. Higher prices of clothing and footwear contributed to 0.3 p.p. growth in monthly inflation. Catering services prices went up by 3.7% and pushed inflation up by 0.2 p.p. On the flipside, lower prices of package holidays decreased the overall inflation by 0.7 p.p., while lower prices of accommodation services (by 5.4%) and other services in respect of personal transport equipment each contributed to a 0.1 p.p. decrease in overall MoM inflation.
Slovenian CPI (January 2011 – September 2023, YoY, %)
Source: Slovenian Statistical Office, InterCapital Research
Taking a quick look at the harmonized index of consumer prices, its growth amounted to 7.1% YoY in September, while on the monthly level, it grew by 0.7%. On average, service prices increased by 8.1%, and goods by 6.5%. In the goods category, semi-durable goods prices increased by 5.7%, non-durable goods prices by 8.4%, while durable goods prices decreased by 0.2%. As compared to the Euro area flash estimate, published by ECB on Friday, inflation stood at 4.3% YoY in September. One can see that Slovenian inflation currently stands at a more elevated level.