On average, housing prices in the EU have increased by 49% since 2010. During the same period, rent prices have gone up by 18%. In this analysis, we decided to see why this discrepancy exists, as well as to take a closer look at the housing and rent prices in Croatia since 2010, and how they developed.

According to the latest statistics released by Eurostat, housing prices have on average increased by 49% in the 27 European Union members. During the same period, the rent prices have only gone up by 18%. As housing is one of the principal necessities for a stable life for a human being, the increase is expected, especially if we take into account the inelastic nature of the supply and demand of real estate. However, rent prices should also follow suit, but as the data shows, it doesn’t, in most cases.

What are the reasons for this discrepancy? There are several major reasons why housing prices have increased so much since 2010. First of all, as already mentioned, supply and demand. Even though the supply of new housing still hasn’t reached the pre-2008 Global Financial Crisis levels, when there were a lot more construction companies and buildings were built left and right (leading to one of the main causes of the crisis itself, the housing bubble), the demand for housing is ever-present. In fact, the demand for new housing is even higher than before. Combined with the lower number of construction projects, we get a supply/demand disbalance, and this leads to higher prices. Of course, the demand by itself was not only driven by the requirements of citizens for housing, but also by the low-interest rate environment we have witnessed for at least a decade now (which is coming to an end with the start of the interest rate hikes in the EU), as well as the various government incentives to purchase new homes, especially for young people (such as the subsidized loans in Croatia).

Furthermore, the housing market is also seen as a form of investment and savings, especially in Croatia. As such, people invest in these types of assets, driving up prices. Also, housing prices are usually correlated with both inflation and GDP growth, as housing itself is a part of the inflation calculation (through the CPI index), and construction is one of the major components of GDP growth. There are other specific drivers of housing price growth, such as land scarcity, which can be an especially strong driver in urban areas. Next up, we also have to consider demographics. For Europe, the demographics would refer to the aging population, and older people usually have higher capital to not only purchase new homes, but higher capital to purchase higher priced homes. Finally, we also have to consider the cost of construction itself, which if we look at the trends, has exploded in 2021 due to the rising commodity and material prices, but has somewhat stabilized in 2022.

All of these factors, in the short and long-term, have an impact on housing prices. Compared to the housing prices, the rent prices have on average gone up by less than half. Like with housing, there are a couple of reasons here. The most important of course is the trade-off between purchasing and renting a home. When people purchase a home, for example taking out a EUR 100k loan in the bank, they plan to pay off that loan in the next 15-30 years. This would mean that on average, they pay app. EUR 400-500/month for the loan repayment. Compared to this, they could get a similarly sized and equipped home for the same amount of money, by renting. For most people, however, the difference between ownership and paying rent is huge, and as such, they are a lot more willing to buy a home than rent it out. One also has to consider that countries in Europe have implemented different laws on rent price growth, and as such, the rent price growth is kept a lot more stable than housing price growth.

Besides these factors, all the above-mentioned factors that affect housing influence rent prices too, but since the demand is stronger for housing, the rent prices are more restricted in their growth. Knowing this, how did the housing and rent prices develop in the last 10 years in the EU?

Housing prices in select European Union members and Iceland (Q3 2022 vs. 2010, %)

Source: Eurostat, InterCapital Research

The prices of housing in the EU have on average increased by 49% since 2010. In the Euro Area (excl. Croatia), they grew by 44%. However, as we can see, there are a lot of differences between countries. The largest overall increase in housing was recorded by Iceland (not part of the EU but tied to it through several agreements), where prices grew by 211%. Following them, we have Estonia at 199%, Hungary at 173%, Luxembourg at 140%, and so on. For the SEE region, Slovenia recorded a 51% increase, Romania 20%, and Croatia recorded an increase of 47%. While the reasons for these increases are different depending on the country, all of them can be explained by one of the above-mentioned factors.

Rent prices in select European Union members and Iceland (2022 vs. 2010, %)

Source: Eurostat, InterCapital Research

During the same period, rent prices have gone up by 18% in the EU, while the largest increases were recorded in Estonia at 210%, Lithuania at 144%, Ireland at 84%, and Iceland, at 77%. The increases in these countries can be tied to their economic growth, land scarcity, as well as the influx of foreigners following this growth, especially when it comes to urban centers. Looking at the SEE region, rent prices went up by almost 40% in Slovenia, 27% in Romania, and 16% in Croatia.

Now that we have the data for the EU in general, let’s take a closer look at the housing prices in Croatia, how they developed, and why.

The average price of new housing sold per square meter in Croatia (2010 – 6M 2022, EUR)

Source: DZS, InterCapital Research

According to the statistics released by the Croatian Bureau of Statistics (DZS), the average price of new housing sold per square meter in Croatia amounted to EUR 1,456/m² in 2010. For the city of Zagreb, this number amounted to EUR 1,635/m², while for other settlements, it amounted to EUR 1,276/ m², on average. The latest data from DZS which is available shows that in 6M 2022, the average prices of new housing sold in Croatia amounted to EUR 2,131/ m², in Zagreb EUR 2,454/ m², and in other settlements EUR 1,746/ m². This would amount to an increase of over 46% in the entirety of Croatia, 50% in Zagreb, and 37% in other settlements compared to 2010.

Finally, we can also look at the difference in prices of existing and new housing in Croatia.

Existing and new housing prices in Croatia (Q3 2022 vs. 2015, %)

Source: DZS, InterCapital Research

With 2015 as the base year (based on the data available by the DZS), prices of new housing increased by 41%, while prices of existing housing increased by 66.7% in Q3 2022 vs. 2015. This would not only mean that we have witnessed high price increases since 2010, but that this growth accelerated significantly since 2015. This, of course, makes sense, as 2015 was the year that Croatia “officially” ended the recession.

In the current situation, with high inflation rates eating away at disposable incomes, as well as interest rates hikes that will affect new loan interest rates (and current variable interest rate loans as well), the demand for housing could slow down. However, at the same time, the demand for housing could also go up, as in this environment housing might be seen as an even “better” form of savings. Furthermore, the entry of Croatia into the Eurozone and Schengen area will also have an inflationary impact on prices, especially when it comes to real estate on the coast, as these are the preferred areas of real-estate purchase for foreigners.

To explore this further, we decided to do a 2^nd part of this blog, in which we will explore how housing prices might develop in the future, taking into account Croatia’s entry into the Eurozone, the current trends in the market, as well as by looking at some examples of countries similar to Croatia who have joined these 2 blocks, and how it affected their housing prices.