Rising property prices in Croatia could pose a risk to the country’s financial system, the European Systematic Risk Board (ESRB) warned in a paper.

Property prices in the Adriatic country have been rising since it had gained independence the 1990s but were further boosted by its EU membership in 2013. On entry to the Eurozone, expected at the beginning of 2023, prices could rise further.

Since 2015, prices have jumped by 55% in the capital Zagreb and by 40% in the coastal areas, while in the rest of the country prices of apartments increased by 22%. In 2021 alone, prices of apartments in Croatia went up by 9%.

“The ESRB has identified medium-term vulnerabilities in the residential real estate sector in Croatia as a source of systemic risk to financial stability, which may have the potential for serious negative consequences for the real economy,” the ESRB noted.

“From a macroprudential perspective, the ESRB considers the main vulnerabilities to be the rapid growth in household credit and possible signs of house price overvaluation, given the absence of explicit borrower-based measures that could mitigate the build-up of risks related to the residential real estate sector,” it added.

The ESRB noted that residential property prices also increased due to the two earthquakes in 2020, which eliminated some older buildings from the market. The government’s housing subsidy scheme, through which 35% of all flats and houses in the country were sold in 2020, has also contributed to the surge of prices.

The ESRB also noted that commercial banks in Croatia are approving housing loans easily, and that the rise of this type of loans is faster than the increase of all other types of credits.

As well as demand from local residents, Croatia is a popular retirement destination, which was picked by International Living magazine as one of the top 25 destinations to retire to worldwide this year. The ranking is based on factors including the cost of living, climate, housing and healthcare. Croatia is also seeking to attract digital nomads with a new visa scheme.