Addressing Housing Affordability in Croatia1
Driven by strong demand, including from foreign investors, and scarce housing supply, house prices in Croatia have risen considerably, stretching house affordability. Unlike in the 2000s, financial stability risks are contained, partly reflecting a low share of mortgage finance. Improving housing affordability can support labor mobility, promote sustainable economic development, and counter negative emigration trends. Policies need to tackle the underlying supply gap in housing rather than helping demand. There is scope to modernize and make better use of the sizable existing housing stock. Reducing or removing the favorable tax treatment of residential real estate investment and short-term rental income would help reduce speculative demand and activate idle housing. Policy action is also warranted to accelerate the modernization of the legal cadaster, develop the longer-term rental market, streamline land regulations, and invest in green social housing and infrastructure.
A. Introduction
1. Housing affordability has considerable economic and social implications. Housing affordability—households’ ability to use their disposable income to cover housing costs while continuing to meet other essential needs and still have an income buffer is macro-critical.2 The relative evolution of household income and house/rental costs or prices has widespread implications for the economy.
In assessing housing affordability, one needs to consider the specificities of Croatian housing market: (i) high homeownership rate (87 percent); (ii) thin and largely unregulated longer term rental market; (iii) persistently low residential mobility, with only 5 percent of the population having relocated in the previous five years; (iv) concentration of demand for tourism services especially along the coast; (v) uneven density for urban agglomerations; (vi) infrastructure gap; and (vii) among the lowest income per capita in the eurozone. If earnings for higher income households—including from foreign investors buying property in Croatia—increase faster than for lower-income households, housing affordability worsens for the latter group, as demand-driven house/rental costs affect average house prices and rents.
It is well established in the literature that housing prices affect residential and labor mobility (Stein, 1995, Genesove and Mayer, 1997). House prices have evolved very differently across Croatian regions in recent years, accelerating in tourist destinations and their gentrified centers (such as Dubrovnik, Split, and Šibenik). As tourism accommodation is heavily skewed toward small private rentals that crowd out rental supply for longer-term use,3 an intensification of tourism activity significantly impacts housing affordability. Rising differences in relative house prices between the coast and inland constrain the ability of lower-income individuals to move to areas where there are jobs available. Lower housing prices in inland areas lock in existing homeowners as their equity becomes too low to meet down payment requirements to purchase a new home. Thus, improving access to housing can support labor mobility, sustainable economic development, and social cohesion.
Population by Tenure Choice, 2023
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source EurostatHouse Price Indices
(2015=100)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source: CBS.House Price Indices for New and Existing Dwellings
(2015=100)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source: CBS.2. Underinvestment in the aftermath of the Global Financial Crisis (GFC) has contributed to the current housing shortage. The GFC house price bubble was at the root of the financial distress in Croatia. The bursting of the bubble led to the bankruptcy of many real estate developers and construction companies. Employment in construction fell by 36 percent between April 2015 and April 2009. A period of falling house prices and scarce supply ensued, with housing market activity picking up only in the mid-2010s. Since 2015, a growing housing demand-supply gap and years of low interest rates that fueled the demand for housing investments led to a significant rise in house prices, which more than doubled in the capital city of Zagreb between 2015–2023. While demand has been buoyant, supply has not yet reached its pre-GFC levels, given the limited pace of new residential constructions. As of 2022, investment in dwellings accounted for 15 percent of gross fixed capital accumulation in Croatia, much lower than the EU average of 26 percent. Productivity of the construction sector has remained at about one third of the EU average; despite picking up in the mid-2010s, it has surpassed the pre-GFC level only in 2018, slightly improving thereafter. Croatia’s construction sector has been characterized by productivity inefficiencies due to its significant fragmentation and a shortage of skilled construction labor, further hampering housing affordability.
Construction Sector
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
3. Croatia’s housing affordability has worsened in recent years. After falling in the first half of the 2010s, prices and rents have grown rapidly in real terms since 2015. Despite the pandemic, house prices resumed their pre-pandemic trends in 2021. Some of the housing stock was damaged and destroyed by the two large earthquakes that hit Zagreb and Petrinja in 2020. The recovery and reconstruction needs were estimated at €26 billion (about 39 percent of 2022 GDP), with the largest share related to housing, much in central Zagreb. Construction activity picked up at a faster pace than the EU average after the reopening of the economy in 2021, boosted by the post-earthquake reconstruction works that accelerated in 2022–2023, burgeoning tourism, foreign demand, improved economic prospects, and Croatia’s entry into the eurozone and Schengen area. Demand for real estate has gone up not only in the touristic regions, but also in most major cities such as Zagreb, Rijeka, and Split. Regional differences of price levels are striking. However, the number of residential building permits stagnated in 2022–23 and remains 1/5 below the pre-GFC peak. The tight labor market led to rising construction costs, further adding to the pressure on house prices.
4. Since the 2000s, the Croatian authorities have introduced measures to improve housing affordability, but some of the measures have also fueled demand. Government spending on housing is relatively high in Croatia compared with other EU countries. The upcoming National Housing Policy Plan until 2030 is expected to define the modalities of housing construction and solving housing issues to facilitate access to the purchase of apartments or the payment of rent through various subsidy measures. The government is considering building flats for rent. Public-private partnerships between towns and municipalities (i.e., local government units (LGUs)) and private banks for affordable rental housing are also considered. Some municipalities that saw fast housing affordability deterioration (e.g., the city of Varaždin) are planning to sell suburban land to young families that do not wish to live in a flat at up to 80 percent discount, based on several socio-economic criteria.
General Government Total Expenditure on Housing and Community Amenities, 2022
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source: Eurostat5. The rest of the paper is organized as follows. Section B assesses how housing affordability in Croatia has evolved over time and in comparison to other European countries. Section C discusses the main drivers, including policies, affecting house prices and affordability. Section D discusses policy options and provides examples of measures to address housing affordability.
B. Housing Affordability Assessment
6. While Croatia’s prevalent homeownership structure and policy support have limited increases in actual housing outlays, housing is less affordable than in many of its EU peers. 85 percent of the population are homeowners without outstanding mortgages or housing loans, compared to 44 percent in the EU. Only 6 percent live in their own homes with mortgages. Nearly 2/3 of Croatia’s population (compared to just over a half in the EU) live in detached houses, while most urban dwellers live in apartments. Variable-rate loans (fixed up to one year) of households account for about 1/3 of housing loans and legal restrictions have slowed the increase of mortgage rates, limiting actual outlays related to housing costs. However, access to homeownership for low-and middle-income households has worsened due to greater difficulties in saving for housing purchases. The young and those with low incomes and unstable employment are effectively excluded from ownership and exert pressure on the very thin longer-term rental market. There are signs of overcrowding of existing housing units while the longer-term rental supply is very low and many units remain vacant, pointing to inefficiencies in the housing market.
Housing Affordability: Housing Cost Indicators
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
7. Housing quality is also an issue, which further limits affordability, via an increase in housing costs. Energy efficiency compares less well with the EU peers, contributing to relatively high rates of energy poverty. Housing energy efficiency and engineering robustness varies considerably with the age of the house. A considerable part of the stock of existing houses in Zagreb (especially those built before the 1950s) does not meet mandatory building energy codes and standards. The earthquakes in 2020 affected the already old and inefficient stock of houses.4 The housing stock will require renovation, maintenance, upgrade of the isolation/heating systems to reach the agreed emission targets at the EU level. Compliance with the EU rules may further increase construction costs and administrative burdens on the supply of residential structures. Price differentiation is already seen between new, energy-efficient dwellings and older ones.
8. Several measures of house price misalignment point to growing affordability concerns in Croatia.
House price-to-inflation rate and price-to-income (PTI) and price-to-rent (PTR) ratios, expressed as deviations from long-term averages or trend values, are the most common indicators of buyer and tenant affordability, while ignoring the role of other factors beyond price (rent) and income. The short time span (data for Croatia is only available from 2002) may distort the assessment. The deviation of real house prices, PTI, and PTR from trends in Croatia has reached 26, -9.6, and, 21 percent, respectively, by 2023Q2. While there are signs of significant overvaluation of real house prices and a widening gap between house prices and rents, PTI is still below trend, indicating that average incomes have grown at a faster pace than house prices. But there may be income distribution and regional disparities in housing affordability. For example, it took 2.3 more years of income in 2022 to afford a flat in Zagreb or Split, and 2¾ more years to afford a detached house in Dubrovnik, compared to the already elevated values one year before.
Econometric analysis: Staff estimates house price overvaluation as moderate at about 6 percent above the equilibrium value as of 2023Q2.
House affordability indices: They are based on indicators derived from micro datasets that mainly focus on income, such as the EU statistics on income and living conditions (EU-SILC), or studies that construct broader measures of housing affordability based on, e.g., the cost of financing. Croatia’s housing cost overburden rates (i.e., share of costs higher than 40 percent of income)—a measure of housing affordability—is lower than the EU average, according to EU-SILC,5 reflecting considerable housing support. For each country, the House affordability Index (HAI) developed by Biljanovska et al. (2023) measures the extent to which a median-income household can qualify for a mortgage loan to purchase an average-priced home. Based on this index, affordability has improved in Croatia compared to post-GFC, but after reaching a peak in 2021, it has recently declined. With an index value of about 70 (indicating that the median-income household had a tough time obtaining a mortgage for an average-priced house), Croatia is among the worst performers in the EU. To capture regional disparities, reflecting Croatia’s appeal as a tourism destination and increased urbanization, Mikulić, et al. (2021) developed a broadly defined affordability index at the regional level and found the lowest affordability in the coastal part of the country, and the capital city Zagreb.
Number of Years to Buy a House, by Large City and Type of Residence, 2022
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Sources CBS and IMF staff calculationsHousing Affordability Measures
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
C. Drivers of House Affordability: Assessing the Demand-Supply Gap
9. Taxation and tourism have contributed to pressures on housing affordability via both demand and supply.
The favorable tax treatment of housing contributes to higher demand while reducing the supply of houses for purchase or longer-term rental. Croatia has very favorable tax treatment of housing investments, reflected in low housing tax rates and reduced tax bases, as well as arbitrage opportunities among various income sources under the income tax (e.g., short-term rental incomes are lightly taxed with an annual lump sum tax6 compared to labor income, and much less than the rest of the EU). Reforming the current tax regime favoring residential real estate investments would help dampen demand, activate idle residences, enhance housing market efficiency, and encourage labor participation.
The attractiveness of Croatia as a tourism destination also contributes to overall house price increases and strong seasonality and concentration, thus fueling demand while constraining supply. Anecdotical evidence indicates that coastal residents have to or prefer moving out during the tourist season because of rising short-term rental and other tourism activity and housing affordability. Tourism activities are prone to high informality, while existing land administration system governing the registration of real property and real rights in property in Croatia (comprising the cadaster and the land registry) is not geared toward serving the tax system.7 Undertaxed properties do not yield sufficient revenues for LGUs thus hurting local development (such as infrastructure and public services).
Effective Tax Rate on Rental Income for Non-Residents
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Sources: Global Property Guide and IMF staff calculations.Implicit Tax Rate on Labor
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source: European Commission – Directorate-General for Taxation and Customs Union10. Several factors have driven up demand for housing:
Higher incomes, domestically and abroad. It is well documented in the economic literature (Wilkinson, R. 1973) that housing has a high income-elasticity of demand, with higher incomes resulting in increased demand for housing. There is a tendency to invest and save money in real estate in Croatia. Demand for secondary residences, particularly by foreigners, has also increased the cost and limited the availability of primary residences, notably on the coast and in central Zagreb (Vizek, et al., 2023; Mikulić et al., 2021). Reforms in 2009 and 2012 made buying property easier for foreign owners and online short-term rental platforms have further boosted demand. In 2021, foreign buyers accounted for more than 20 percent of the total value of purchases, especially in the high-end residential market segments. Economic growth could raise affordability issues for low-income households if their incomes do not grow in line with housing costs and prices.
Housing subsidy scheme for young families buying a residence for the first time (expired at end-2023). Experience shows that housing subsidy programs of this type contribute to faster price growth especially in areas with scarce supply or typically in high demand, and cannot address housing shortages (Kunovac and Žilić, 2020). During 2017–23, the Croatian Real Estate Agency (APN) provided, once or twice a year, subsidized credit of first-time buyers, who are Croatian citizens, not older than 45 years and meet banks’ qualification requirements. About 37,000 housing loans (including full use of the 2023 allocation) were subsidized during 2017–23.
11. The housing stock, although increasing in recent years, has not kept up with demand.
State-subsidized housing construction program (POS), in force for 21 years, is implemented through the construction of apartments/residential buildings for sale by installments at a more favorable price/m2 (max 1.5 x standard construction price) and financing (interest below 2 percent since July 2019, 30–31-year repayment period) than the market. Commercial banks participate in the process, and are repaid before government, in the first repayment period that can last up to 21 years. There is an option for citizens to rent, then later purchase, the constructed apartments. In July 2019, POS was amended to also allow the purchase of apartments on the free market at the same favorable conditions to attract/retain deficient public sector personnel in underdeveloped areas or on islands. Since its inception, almost 9,000 apartments have been sold with a total investment value of €571 million, out of which €146 million are subsidies.
High and rising share of unoccupied dwellings registered as permanent residence. According to the latest Census of Population, Households, and Dwellings (2023), there were almost 2.4 million apartments, representing an increase of 6.5 percent compared to 2011. However, the number of occupied apartments decreased by 4.2 percent, while the number of vacant apartments increased by a staggering 43 percent. Idle housing units account for about 30 percent of the existing housing stock in Croatia (about 595K units).
Scarcity of construction land, most notably in the two largest cities, Zagreb and Split. There is a significant share of agricultural land that is no longer used for production and in many instances has become idle. The alienation or acquisition of privately-owned agricultural land is not regulated by a specific law. The legal procedures to consolidate land are long. Some LGUs also own centrally located land plots (brownfield, e.g., former factories) that are not put to use.
Construction sector characteristics, as well as skills and labor shortages lead to higher construction cost and lower productivity. Small construction companies, shortage of skilled labor in construction, and long time to build present challenges.
Incomplete, out-of-date, and inconsistent cadasters and urban plans that can impede (re)development. Real estate data is generally fragmented.8 Close cooperation among several institutions that are dealing with different aspects of land registration, ownership, and market values is essential to establishing comprehensive and accurate legal and geodetic property registers. The physical cadaster covering the total surface area of Croatia is managed by the SGA (within the Ministry of Urban Planning and Construction), except the City of Zagreb which has its own Cadastral Office. The land registry is within the municipal courts (Ministry of Justice). An added difficulty comes from the fact that although the whole country has been surveyed, a significant share of parcels in the cadaster do not reflect accurate data on ownership and are not harmonized with the land registry. The change of urbanistic planning and zoning is proceeding slowly, and the last change for Zagreb took place in 2016.
Number of Dwellings and Surface Area by Occupancy Status
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
12. A thin private rental market serving the tourism industry makes housing supply more price inelastic. At about 8 percent of total dwellings, the share of resident households living in rented houses is among the lowest in the EU. Nevertheless, on average, private rentals account for % of all tourist accommodations in Croatia (higher in locations with stronger tourism seasonality), making housing supply more price inelastic relative to tourism destinations where hotels/other collective accommodations dominate. Recent house price increases led to an increased demand in the rental segment as a proportion of the residents decided to delay their purchase of a home and instead decided on renting (EIZ, 2023). However, the long-term rental market is small. Most long-term rental properties are in Zagreb, Dubrovnik, and Split. The Adriatic coast is the core of short-term demand, concentrating on short-term holiday rentals.
Supply and Demand Factors
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
13. Estimating the housing supply gap. Even accounting for the falling population in all regions, besides the greater Zagreb area, the total number of dwellings fell below 400 per 1,000 inhabitants as of 2022. The 2020 earthquakes damaged over 35,000 buildings, rendering over 10,000 dwellings at least temporarily unusable, equivalent to 0.6 percent of the national housing stock. The housing supply gap, by region and overall, is measured as the difference between the actual occupied housing stock and the housing stock that would bring Croatia’s household size down to the EU average (from 3.0 to 2.7), reflecting unfulfilled demand for housing (e.g., from the young and the low-income). We estimate a gap of 232,750 units, or 16 percent of the existing housing stock. The pace of annual construction, measured by the number of residential housing permits, has been at about 2 million sqm, translating into about 28,500 of 70 sqm units per year. On the other hand, there are estimated 595,000 vacant properties in Croatia.
Housing Supply Gap by Region, in Number of Housing Units and Share of Existing Stock
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
D. Policy Options and Recommendations
14. The tax treatment of residential real estate has important implications for the wider economy. It affects the incentives to invest in housing relative to other forms of investment, labor mobility and participation, house use, and house prices (OECD, 2022). Despite its importance for housing affordability and fiscal policy, Croatia has not undertaken significant reforms to improve the design of real estate taxation in the last decades. The potential of recurrent taxes on immovable property remains largely untapped, relative to the rest of the EU. Currently, residential and commercial immovable properties are not subject to a recurrent market value-based property tax. Instead, Croatia imposes an annual area-based tax on a relatively small number of vacation homes or cottages for temporary use during summer. 9 There are also transfer taxes on change of ownership (sales, inheritance, and donations). Revenues from taxes on property in Croatia are negligible.
Share of Taxes on Property in Total Tax Revenues, 2020
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Source: OECD.Croatia: Housing Taxation Over the Life of Investment
Croatia: Housing Taxation Over the Life of Investment
| Acquisition | ||
| Transaction tax | 3% | Purchase of new properties are taxed VAT (25%} and no real estate transaction tax. |
| Holding | ||
| Income tax (final income) | ||
| residential purposes | 12% | 30 percent lump-sum deduction of tax base (rental fee) for expenditure. |
| touristic purposes | Qu-€200/year/bed | Annual Flat Rate Tax applied to number of beds/accommodation units_ For revenues below €40,000, short-term rent income is deemed income from property, hence VAT exempt; above the threshold it counts as independent personal services liable to charge and remit VAT. |
| companies | 10–1396 | Business income such as rental income and capital gains are subject to corporate income tax. Rental income is subject to VAT [25%] if the rented object is located in Croatia. Providing accommodation services is taxable at 15%. Rental income for residential purposes is VAT exempt |
| Mortgage interest relief | POS: One-off tax relief for home buyers | |
| Property tax | N.a. | No annual real estate lax. Only the ownership of holiday homes (secondary residences) is taxed, regardless of whether the owner is an individual or a company, or a resident or a non-resident. The tax on holiday homes is set in the range €2–5 per sqm of usable floor area by the relevant LGU and is paid annually. Other small local taxes include an utility charge per sqm and a communal fee |
| Net wealth taxes | N.a. | |
| Disposal | ||
| Capital gains taxes | 24% | Exemption for holding the property longer than two years |
| Inheritance and gift taxes | 3–4% | Inheritance and gifts are exempt from taxation in the first line of succession. |
Croatia: Housing Taxation Over the Life of Investment
| Acquisition | ||
| Transaction tax | 3% | Purchase of new properties are taxed VAT (25%} and no real estate transaction tax. |
| Holding | ||
| Income tax (final income) | ||
| residential purposes | 12% | 30 percent lump-sum deduction of tax base (rental fee) for expenditure. |
| touristic purposes | Qu-€200/year/bed | Annual Flat Rate Tax applied to number of beds/accommodation units_ For revenues below €40,000, short-term rent income is deemed income from property, hence VAT exempt; above the threshold it counts as independent personal services liable to charge and remit VAT. |
| companies | 10–1396 | Business income such as rental income and capital gains are subject to corporate income tax. Rental income is subject to VAT [25%] if the rented object is located in Croatia. Providing accommodation services is taxable at 15%. Rental income for residential purposes is VAT exempt |
| Mortgage interest relief | POS: One-off tax relief for home buyers | |
| Property tax | N.a. | No annual real estate lax. Only the ownership of holiday homes (secondary residences) is taxed, regardless of whether the owner is an individual or a company, or a resident or a non-resident. The tax on holiday homes is set in the range €2–5 per sqm of usable floor area by the relevant LGU and is paid annually. Other small local taxes include an utility charge per sqm and a communal fee |
| Net wealth taxes | N.a. | |
| Disposal | ||
| Capital gains taxes | 24% | Exemption for holding the property longer than two years |
| Inheritance and gift taxes | 3–4% | Inheritance and gifts are exempt from taxation in the first line of succession. |
15. Croatia needs a modern, well-designed property tax to replace—fully or in part—the present fragmented system of square meter-and transfer-based taxes and fees, which lacks transparency, fairness, and revenue-raising capability for local governments. A tax based on market-value could induce a substantial improvement in the use of land and would, furthermore, enable a move away from more distortionary taxes such as high social taxes and property transfer taxes. It would also enhance accountability at the LGU level. Although reduced in 2019, the property transaction tax is levied on housing purchases at a relatively high rate, even though this type of taxes is recognized to be highly distortive and may reduce housing market efficiency and hinder worker mobility. It could be lowered to facilitate transactions. The incomplete, and in some respects inaccurate or non-existent, land registry should not prevent property tax reform in the short term, as the experiences of other Central, Eastern and Southeastern European (CESEE) countries have shown (e.g., Bosnia and Herzegovina, Montenegro, Romania, and Slovenia).
16. Personal income tax (PIT) equity should be improved, particularly by removing the excessively favorable taxation on short-term rental income. The effective tax rate on rental income for nonresidents is the lowest in the EU. The authorities should make sure that taxation and regulation of short-term rentals are neutral by comparison with other sources of income to avoid the excessive conversion of dwellings away from long-term residential uses. Ensuring that any reforms treat investments in private rental housing and owner-occupied housing equivalently would help develop a bigger rental market.
Taxation of Housing in Croatia
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A003
Croatia: Introducing a Modern Recurrent Property Tax in Croatia1
A modern value-based and revenue neutral property tax would help rebalance the existing tax structure toward a more neutral and efficient tax system. It can be introduced in two phases:
In the near term, building on existing data registers, transform the communal fee into an elementary, more equitable value-based property tax, by recalibrating the coefficients for zoning and property use (and possibly expanded by property age/quality criterion)2 to better capture actual market values. The communal fee will become a “benefit tax” at the local level, levied on the broadest possible set of property that benefits from local government services (e.g., infrastructure, education, healthcare). Its earmarking should be abolished, becoming a true own-revenue local tax. Existing exemptions should be curtailed, to have the broadest tax base possible, which would allow for the lowest possible rate levels. The benefit rate can initially be set at a level that at least offsets the decline in revenues from the repeal of the vacation homes tax and lower transaction tax, then evolving to approximate market values. The transaction tax could offer important information on property market values during this phase. A working group could be set up at the Ministry of Finance with participation of relevant stakeholders, to prepare property tax discussion documents, legal drafts, guidelines for revision of coefficients by LGUs. Measures to shield low-income households from adverse impacts of reform should also be prepared early on.
Over the medium term, move to a full-fledged value-based and revenue-neutral property tax, following completion of the necessary technical and legal preparations, including title register and fiscal cadaster. Best international practice shows that a flat uniform rate should be applied to a base with a minimum of exemptions, with a uniform treatment of business and residential property. Measures to shield low-income owners from potential adverse impacts of the property tax include adopting a tax threshold expressed in value (possibly supplemented by special tax deferment rules for the elderly and for cases of unknown ownership), which would at the same time enhance the progressivity of the tax. It is important to complete the necessary administrative infrastructure, based on a central cadaster with accurate and up-to-date information on property coordinates and ownership, supported by a modern and comprehensive property revaluation system, including clear appeals procedures. Tax provisions could be considered in cases where individuals or companies own multiple properties, possibly located in different municipalities. Local governments could be incentivized to make fuller use of property taxes through reductions of intergovernmental transfers, and/or by prescribing a band for the tax rate. Local governments with limited capacity to develop and maintain an administrative system for the collection of the communal fee may decide to outsource this task to the Tax Administration.
1 Based on Norregaard, et al. (2012). 2 The current communal fee, while resembling a rudimentary property tax in its objectives, has several design weaknesses. For example, the coefficient for the use of property is skewed toward taxing commercial versus residential properties and does not consider the age nor the quality of the building. Being locally administered, the property and ownership databases, upon which the communal fee relies, are generally incomplete and not properly updated.17. Policies to improve affordability need to address the underlying supply gap in housing.
Accelerate the modernization of the legal cadaster. The government is undertaking a welcome consolidation of the cadaster under the National Recovery and Resilience Plan (NRRP). There is a need for further improvements to the quality of the land registry and cadaster data and to link the data in the Joint Information System to other key registers (e.g., PIN, addresses). The two IT systems exist in parallel within two different ministries. There is a need to harmonize data in the cadaster and land registry, update it to reflect the reality, and finalize merging the data into a single database.
Make better use of the existing vacant space (housing and land).
The existing housing stock should be modernized. New construction is not the only way to bring supply in line with demand. The renovation and upgrading of the dwelling stock can help match demand and reduce vacancy rates. Carbon pricing revenues can be recycled to subsidize the retrofitting of existing housing, in addition to the use of EU funds, and create incentives for homeowners to comply. For example, subsidies could be introduced for the energy-efficient renovation of old buildings to expand the use of housing stock and its energy performance. Ensuring that repairs and reconstruction of buildings damaged by the 2020 earthquakes improve their energy efficiency, and transitioning heating and cooling systems to renewable energy sources can accelerate energy savings.
Croatia should take stock of vacant properties—including public buildings—and identify and reduce the disincentives that create the vacancies. Measures to further encourage owners to make use of their properties can include: (i) higher property taxation on non-primary residences (as in Austria) or tax surcharges on vacant dwellings in big cities (as in France, Ireland, Israel, and United Kingdom), accompanied by penalties and credible enforcement; (ii) shifting some housing subsidies that favor high-income homeowners toward private investment in rental housing development; (iii) limitations on short-term vacation rentals. Furthermore, measures that make use of the vacant land can consider: (i) convert unused commercial real estate into affordable housing (as in France); and (ii) “gentle requisitioning” and conversion supported by fiscal incentives of underused or abandoned facilities into social housing (as in Belgium, Germany, and Italy).
All land not covered by the new property tax should be subject to a simple area-based land tax, the yield of which can accrue to the central government to co-finance the modernization of the cadaster. As an incentive to consolidate the numerous small plots of land, a tax holiday of 3–5 year could be considered, which would exempt from the transfer tax any land transactions that clearly serve land consolidation purposes (Norregaard et al., 2012).
Invest in green social housing and public infrastructure. Investing in green social housing construction, directly by the LGUs or indirectly through non-profit or reduced profit associations (as in several U.S. states) can improve affordability for low-income households. For eligible low-income tenants, eligibility should be portable to increase labor mobility (e.g., vouchers portability in Maryland). Furthermore, the development and sustainability of residential areas rely on good infrastructure (public transport, water, energy, and public spaces) and accessibility of essential community services (European Commission, 2019)
Streamline regulations. Easing and simplifying land use regulations as well as accelerating rezoning and administrative processes can enable housing development. The geographic boundaries on urban development could be regularly evaluated. Croatia does not have a national urban planning policy, which hampers the real estate market and housing supply. The coordination between different government levels to reconcile the objective of housing affordability and environmental preservation could be improved. Furthermore, converting brownfield land for affordable housing can be an effective way to develop urban areas and revive abandoned spaces in/around Zagreb while reducing the need for greenfield development which preserves undeveloped land and reduces urban sprawl.
18. Efforts should be made to facilitate the development of the longer-term rental market. Investment in affordable rental housing can counteract socioeconomic divergences, facilitate access to employment across locations, boost employment in the short term, and lower carbon emission if investment targets greater energy efficiency. Measures to boost the rental housing stock and access to it could consider: (i) targeted income support programs (housing allowances or vouchers); (ii) targeted regulations (as in Germany, where the use of dwellings for nonresidential purposes was prohibited in some high-density areas); (iii) tighter rules on short-term rentals (such as Airbnb)—as adopted in Berlin, Barcelona, Dublin, and Paris; (iv) review of renter–landlord regulations. If not adequately balanced (e.g., excessively restricting evictions), balancing the rights could increase rental housing supply.
19. Demand-side interventions need to be very limited in size and narrowly targeted at specific disadvantaged groups. Measures such as subsidies, even if well targeted, tend to be effective only in the short term, as they at least partially contribute to higher house prices or rental costs over the medium term. Support to households for homeownership, particularly mortgage interest deduction, tends to be non-targeted and regressive, benefiting mainly high-income households with better access to mortgages (Elfayoumi, 2021; OECD, 2020). It is important that measures aimed at facilitating household and corporate financing target construction of new homes or retrofitting of existing low-quality houses to avoid fueling demand pressures against a very limited housing stock, thus pushing prices up and worsening affordability.
References
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The Economic Institute Zagreb (EIZ, various authors), 2019-2023, An overview of the real estate market in the Republic of Croatia, Annual EIZ Reports, September.
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Prepared by Irina Bunda, with assistance from Jibingxin Han. The analysis has benefited from comments and suggestions from Josip Funda, and staff of the Ministry of Finance, Croatian National Bank (CNB), Ministry of Physical Planning, Construction, and State Assets, Croatian Tax Administration Office, and participants of the seminar held at the CNB on June 6, 2024.
As a rule of thumb, housing is considered affordable if households spend up to 30 percent of their gross income on housing costs including insurance and taxes.
See Box 1 in CNB’s Financial Stability Report, June 2024.
Broken down by the year of construction, most occupied flats were built in the period between 1971 and 1980 (one fifth).
1–2 and 3.5 percent during 2002–23 for homeowner with/-out mortgage or housing loan, compared to 4.3 and 5.1 percent for the EU, respectively.
Annual lump sum tax per number of beds per household member, while income is below a threshold.
To serve the tax system, which is one of the functions of the physical cadaster, the information on occupancy and physical characteristics of parcels (cadaster) and ownership and other real rights (land registry) should be harmonized and integrated into an unified information system at the national level, and linked with other key registers that would facilitate the assessment of the tax base and determination of credible marker values of all property parcels in Croatia. The cadaster also should be able to reflect illegally built construction, for tax purposes. Increased automation, streamlining of functions, and transparency would facilitate access to data by citizens and spur the development of a better functioning real property market.
Some data can be found in the Ministry of Finance (sales transactions), the Croatian Bureau of Statistics (average sale prices, data on housing units and dwellings), Ministry of Justice (land registry), State Geodetic Administration (SGA) (cadastral data), and LGUs (property and ownership databases).
The tax on vacation homes is an optional tax on houses for occasional use; LGUs independently decide on its introduction within the rates provided for in the Law on Local Taxes. It ranges from 0.60 to 5.00 euros/m2 of the useful surface. As of 2023, 1/10th of total dwellings was occasionally used for vacation, generating 0.03 percent of GDP.
