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Housing Finance Market Overview
In Croatia, housing finance is mainly raised from banks but also from Bausparkassen. Banks dominate the housing finance market with a share of almost 95 per cent, but the Bausparkassen (which entered the market in 1997) were able to increase their market share very rapidly and held already 5 per cent of the market in 2008. The housing finance market has seen a massive boom in Croatia since the year 2000. The mortgage debt to GDP ratio increased from 4.7 per cent in 2000 to 15.3 per cent in 2008.
The Market from the Perspective of the Demand Side
In Croatia, the usual maximal loan-to-value ratio amounts to 70 per cent. A fiscal deduction of mortgage interest paid is granted by the government up to a set maximum. The Croatian economy is highly “euroised” so that 75 percent of long-term bank loans (whereof the largest part are mortgages) to households are index linked to foreign currencies in some way or another (mainly to the euro, though recently loans have been largely Swiss-franc). The most loans are fixed interest loans.
House Price Development
From 2002 to 2006 there has been only a modest growth in housing prices in Croatia with annual growth rates of only 2 per cent. Yet, 2007 was an exceptional year in the Croatian housing market; the average price of newly built dwellings in Croatia surged by 26 per cent. In 2008, this boom was finished again and house price increases back to normal (over 3 per cent).
Special Characteristics of the Market
Croatia has a contractual savings system, the Bauspar system which is characterized by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. The government grants an interest premium equal to 15 per cent of the amount saved (up to a set maximum).
Fearing financial instability, the Croatian National Bank limited lending growth to 12 per cent per annum in 2008 and issued new guidelines to banks on managing household and currency-induced credit risk, including a 75 percent loan-to-value ratio limit.
Banks and Bausparkassen fund their mortgage market activities almost exclusively with deposits. Some funding through parent bank loans also occurs.