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welcome to Across the Vulcan it's great to have you with us on the show I'm ludovico brignola Croatia's property prices keep sky rocketing as the Country recalls the highest annual increase across the European Union house prices in the country have been rising steadily over the years but the latest report by eurostat shows they've had the highest growth across the entire EU in the first quarter of 2023. the agency also says they surged five times above the EU rates in the final quarter of last year while many blame inflation for the record numbers some say it also has to do with Croatia joining Schengen and the Eurozone Vegas went to Zagreb to find out the answer foreign buildings are rising all over Zagreb but the current construction activity resulting in roughly 3 000 Apartments per year does not even come close to meeting the demand the result property prices not only is agreb but also in Croatia in general have recorded the highest growth rates per square meter in the EU City recorded transactions is it sounds much more dramatic in numbers the price per square meter in Croatia grew by more than 17 percent in the last quarter of 2022 alone which was almost almost five times higher than the EU average a new building in a good location is almost as expensive as Vienna Berlin or Rome foreign yeah where it separates customers into two categories one of them is precisely those who to a large extent are responsible for the increase in prices buyers with deeper Pockets who decided to invest in real estate because of the historically low interest rates on Bank savings is this is Philip he had a child and wanted to move his family away from renting to ownership and although he submitted down payment for the construction of this building it did not prevent the developer from taking advantage of the market situation and Rising the agreed price is figures showed that in 2022 home prices in Croatia grew 20 per square meter compared to the previous year in Zagreb it was whopping 32 percent looking at the last few years the situation looks even more pessimistic in 2022 real estate prices in Croatia over 62 percent higher than 2015 while 82 percent higher in zagrebs uh Dragon Martino which is developer too he has put about 100 apartments on the market in the last three years but unlike many others he says he does not raise prices and tries to remain realistic to not take advantage of the market situation yes martinovic believes that this Market is by no means healthy and that it is reminiscent of the real estate bubble that burst in 2008 and 2009 after which the industry needed six to seven years to recovery mechanisms the market is indeed showing some signs of coming down in most of the European Union real estate prices are falling due to pressure from rising interest rates and while this isn't quite the case yet in Croatia where interest rates are at just four percent there is a noticeable drop in transactions future buyers could be in for some good news as real estate analysts agree that the price correction is long overdue it won't be like the one in 2008 during the global financial crisis but it will bring prices down there is Unwritten rule among some economists that real estate Cycles last eight years so it could happen anytime now the following prices could also trigger a real estate tax an unpopular measure that no government has yet had the courage to implement despite it being suggested by the IMF and European commission but now opinions have changed [Music] believes that the tax is necessary because it would shift taxation from labor to Capital and also reduce real estate speculation last year up to 70 percent of Apartments were bought with cash and some say this may indicate possible money laundering when Croatia switched from the kuna to Euro in 2023 anyone and who deposited more than 10 000 Euros in the bank had to explain where they acquired that money but if they bought real estate that was not the case meanwhile the circumstances across the border aren't all that Rosy either the real estate situation in Serbia and Montenegro is quite similar to the one in Croatia Russian and Ukrainian citizens moving to Serbia raise prices and in Montenegro where until a year ago there was a Golden Passport scheme demand has fallen but prices are still stubborn High Maria Bosch Milo Savage runs a real estate agency in Montenegro and says neither sellers nor buyers are satisfied and while prices per square meter in the capital pogoriza approached 2 000 Euros the coast is dominated by a luxury real estate designed for immigrants with so-called golden passports um Maria also has experience working in the Serbian Market she says the average prices in Belgrade are similar to pogoriza except that Serbia has recorded a huge jump in the volume of sales last year it amounted to around seven and a half billion euros foreign in a region where owning a home has been ingrained across Generations High real estate prices have another negative effect forcing young people to move abroad the key may be State policies that will devise a solution to the housing issue but for now they are none Croatia [Music] let's bring in Professor Dr visarjodja Who joins us now from Pristina he's a dean of real estate school at the University for business and technology in Kosovo thank you very much for joining us today right so we've seen real estate prices especially in Croatia really Rising exponentially between 2021 and 2022 and they continue to do so some uh 14.8 percent increase versus a European average of 7.7 percent what's happening that's an insightful question and the 14.8 percent increase in real estate prices compared to the 7.7 percent which is the EU average is indeed a complex issue with multiple contributing factors one of them is supply and demand there is a limited housing Supply and increased demand in these in Croatian in other Balkan countries driven by rapid organization economic growth foreign investment in these countries infrastructure Investments tourism investment in countries such as Croatia Montenegro and Albania which have all pushed prices up then economic recovery from the pandemic is capitalized into the prices of real estate the post-pandemic economic recovery and low interest rates have also fueled buying activity and further driving the demand then there is the rising cost of production this is a critical factor that cannot be overlooked the war in Ukraine Ukraine has triggered the right in the cost of fuel steel and other Commodities essential for building materials this has directly impacted the cost of production of real estate contributing to the price increase in throughout the Europe European Union globally but also not overlooking Croatia and other Vulcan countries right it's interesting Professor that you also mentioned tourism and foreign investments playing a role Croatia also we know joined the EU in 2013 became the blog's 28th member but also at the start of this year it introduced the Euro some say this is playing a role with this inflation Rising uh property prices do you agree yes I agree of course Croatia's accession to the EU opened up new opportunities for investment trade economic growth then the integration into the single Market allowed for increased Capital inflows including foreign direct Investments directly in the real estate sector this likely contributed to Upward pressure on property prices particularly in Prime locations and tourist destinations in Croatia then the recent adoption of the Euro also has identified this trend how through the increased investment appeal the adoption of the Euro enhances investor confidence by reducing the currency risk in transaction costs this attracts both domestic and foreign investors to the real estate market driving up both the demand and also the prices then access to cheaper credit joining the Eurozone often leads to lower interest rates lesser currency risk making the borrowing cheaper this fuels the demand on for real estate both from Individual home buyers but also from property developers leading to price increases then there's also the tourism impact Croatia's tourism industry is a significant part of its economy and the adoption of the Euro have made travel more convenient for tourists from other Eurozone countries potentially boosting demand for short-term rentals beneficial Properties or secondary homes further driving after the prices travel you say became more convenient for many people who live in the European Union and tourism plays a key role in Croatia's economy as a whole I wonder how big a role given that the cities that saw a real boom in property prices were the capital of Zagreb but also Dubrovnik known for its medieval walls and obviously the cities on the Adriatic Coast as well is this a blessing for the country's GDP or a curse considering the inflation it brings about tourism indeed plays a vital role in Croatia's economy contributing significantly to the country's GDP gross domestic product the Allure of cities like Zagar known for its vibrant urban life but also the robbing famous for its medieval walls and stunning adriaticos has attracted tourists from around the world of course this has a two-fold impact on the real estate market as you rightly pointed it's a blessing for GDP why because the tourism boom has led to increased demand for accommodations restaurants and other tourism related services this has spurred investment in real estate both in commercial and residential sectors contributing positively to economic growth and employment the coastal cities in particular have seen a surge in property development catering to both tourists and investors seeking vacation homes but also as you mentioned it's a potential curse for Real Estate inflation on the flip side The increased demand has led to Sky rocketing real estate prices especially in these tourist hot spots such as Dubrow Nick as you mentioned well this is benefit is property owners and developers it has also made housing less affordable for local residents especially for affordability issues so the inflation in real estate prices may also pose risk of a bubble if not managed carefully comparatively even other coastal areas in Montenegro and Albania have also seen Rising real estate prices driven in part by their growing tourism Industries montenegro's picturesque Coastline has attracted foreign investment while Albania's relatively lower property prices have also made it emerging destination for tourists and investors the likes interesting Professor but because on this very point I was going to ask what's happening in the Balkans more broadly is there a trend there or is this specific to Croatia we're also seeing price rises in other real estate markets for instance how is the situation in Costa level right now a real estate market in the Balkans shows a prevalent trend of over evaluation particularly in City centers all the development it revolves around the capital cities cities like Christina which is capital of Kosovo but also other cities such as Skopje the capital of Macedonia then Belgrade and Zagreb are marked by high price to rent ratios which is the measure through which the valuation is measured for all the urban economies and these price to rent ratios are above 20 and the signaling over valuation this could indicate the prices are rising it may not be supported by underlying rental incomes posing a potential risk for both investors and home buyers on the other hand cities like pogorita and Tirana have a are more fairly valued reflecting the balance imbalance between price and value so the Iran shows the mixed assessment with over evaluation in the city center in Fair valuation outside I have done also a comparative study with the Istanbul and Ankara and comparing all these cities in the Balkans with the Ankara and and Istanbul as a metropolitan of the world so these cities in the voltas are how to say more overvalued than Istanbul and Ankara this is uh showing a huge trend of over evaluation due to different factors that that play a role absolutely and quickly just because we're running out of time Professor just quickly one last point you mentioned low interest rates being part of the picture and it also talked about State subsidies in the housing sector and I wonder how can the government start tackling this issue in Croatia and in the rest of the Balkans as well so how can it can it can through increasing housing Supply by incentivizing the construction on affordable housing is in zoning restrictions through regulatory oversight implementing stricter regulations on informal buying from informal economy especially lots of demand comes from informal economy revisiting subsidy schemes interest rate policies for those countries that have their own currency such as Albania than the Serbia Macedonia but there's nothing not much to be done by the in terms of interest rate policies from the progression because this is regulated on the in EU level than the tourism Management in tourist hospitals like Dubrovnik managing the impact of Tourism and real estate may involve regulation on short-term rentals and investment in community housing projects then Regional collaboration learning from each other Balkan cities can collaborate on best practices and provide valuable insights how to deal and tackle the tourism growth and and the strike balance between the sustainable real estate development and the prices right and unfortunately we ran out of time but Dr visarja thank you very much for being with us today and for your insightful analysis