There is some anecdotal evidence to support the theory that the residential market is headed for a correction, or that a correction has already started.
The constant rise in Croatian residential real estate prices over the past few years gives pause for thought. Many Croatians believe that prices cannot fall - perhaps because they never have. However, there is no reason why Croatia should be immune to the boom-and-bust cyle that characterises all developed real estate markets. There is some anecdotal evidence to support the theory that the residential market is headed for a correction, or that a correction has already started:
- The increasing number of "discounts" and "price specials" being offered - What appear to be still large quantities of speculative (i.e. not pre-bought apartments being built) - Apartments appear to be taking longer to sell - in northern Zagreb, buildings completed late last year and very early in the spring still don't seem to have been sold out. - Developers' margins may be so high that they can afford to discount heavily - Rents have not risen at the same rate as prices, implying that prices will have to fall in order to realign. - The lack of population growth to support long term price increases.
The residential (overwhelmingly apartments) boom has been driven by three factors: (a) the introduction of mortgage finance; (b) increased incomes, particulalry as a result of the growth of the services sector; and, (c) pent up demand for new accomodation driven by changes in the Croatian social attitudes - i.e. kids don't want to live with their parents unless they have to. Of these three factors, the first has probably been most important in combination with falling interest rates over much of the past five years (particulalry given the impact of rising incomes at the same time).
Without strong population growth the fundamental support for rising demand (and hence one foundation for price rises) is missing. From the demand side, this problem is made more acute by extensive government-sponsored programmes to build low cost apartments, which reduce the number of first time buyers needed to provide new demand for private housing.
These are a long term factors, but in the short term I am more troubled by the amount of speculative construction, and the apparent slowdown in sales, which are characteristic of the last stages of a boom where an overhang of unsold property develops and is then "dumped" by developers needing to pay their construction financing (this has already been observed in the commercial real estate market). The thick margins enjoyed by developers may make this much easier to do, and consequently remove some of the resistance to price declines which would otherwise come from this source.
Even the current "discounts and specials" have potentially difficult implications for mortgage lenders: if a developer offers 20% discounts from the prices paid by the initial purchasers in a building, then the appraised value of those first apartments should be adjusted downwards to reflect the comparable market price - i.e. potentially creating a need for provisions. Provided the "discounts and specials" remain limited, it is probably feasible to ignore them; however, if the price of new construction starts to fall accross the market, then the need to adjust provisions - or ask borrowers for more equity - may become a major issue.
