Federica De Pace
OECD Economic Surveys: Croatia 2026
Abstract
House prices have surged, driven by buoyant domestic and foreign demand, alongside rising construction costs. High vacancy rates and short-term holiday rentals constrain the supply of housing for residential purposes, challenging housing affordability. In 2025, Croatia has adopted the National Housing Policy Plan until 2030 and reformed its taxation of immovable property to encourage better use of the housing stock. However, further tax reforms are needed to increase equity and housing efficiency and reduce distortions in capital allocation. Efforts to develop the private long-term rental market and ensure adequate supply of social and affordable rental housing would enhance labour mobility and better support the most vulnerable households. Reforming land use policy, streamlining building permit procedures and raising productivity in the construction sector would help expand housing supply where it is most needed.
Real house prices and rents have increased rapidly in the past decade, fuelled by buoyant domestic and foreign demand (Figure 2.1). Despite a pronounced population decline over the past decade, strong income growth and falling unemployment along with policies supporting homeownership have boosted domestic demand for housing. At the same time, robust tourism growth (Figure 2.2) and reforms that facilitated the real estate purchases of foreigners have fuelled foreign housing demand. In 2022, foreign buyers accounted for more than a quarter of the total value of housing purchases (IMF, 2024[1]). More recently, Croatia's entry into the Eurozone has further reinforced demand. Finally, high net immigration following changes in migration policy (see Chapter 4) has dampened the impact of natural population decline adding to housing demand pressures.
Source: OECD Analytical House Price database.
Nights spent at tourist accommodation establishments, per thousand inhabitants
Source: Eurostat.
The housing stock is sizeable but inefficiently used, leading to shortages of residential housing. Despite a high number of dwellings per inhabitant compared to OECD countries (Figure 2.3, panel A), a significant part of the stock is not used for residential purposes. Around 15% of the housing stock is vacant all year long and around 10% of residential dwellings are used for short-term holiday rentals, in total a high share by international comparison (Figure 2.3, panel B). While vacancy rates are higher in low-density districts, they are also notably elevated in major urban centres such as Zagreb, Split and Rijeka (Figure 2.4). This contributes to inadequate supply for residential units, especially in the long-term rental market. In addition, around 2% of the housing stock was damaged after the 2020 earthquakes that hit Zagreb and Central Croatia. Against this background, the authorities estimate a gap of housing for residential purposes of 236 731 dwellings (10% of the housing stock) (MPGI, 2025[2]).
Source: OECD Affordable Housing Database; Croatian Bureau of Statistics.
Population density and vacant dwellings by municipality and city
Source: Croatian Bureau of Statistics.
House prices have grown less than incomes on average (Figure 2.5, panel A), but housing affordability remains a challenge for many households. Similar to other transition economies, as a result of the privatisation of state‑owned housing in the transition to a market economy in the early 1990s, 91% of households own their homes (OECD, 2025[3]). This reduces wealth inequality and implies that on average in 2024 only a low share of households (5.1%) were overburdened by housing costs -defined as a situation where households spend more than 40% of income on mortgage and rent- in comparison with 9.2% in the average OECD country (OECD, 2025[3]). However, the share rises to 31% among low-income households—slightly higher than the OECD average of 29%. Disparities in housing affordability between regions and households are also high. In the Dubrovnik and Split counties, buying a 75 m² apartment at the median price requires 18 and 19 years of net disposable income—four more years than the national average (Figure 2.5, panel B). In addition, access to homeownership or rental housing options are limited for young adults, with Croatia showing the highest share of adults aged between 20 and 29 living with their parents and among the highest overcrowding rates in the EU (Figure 2.6).
Note: In panel B, data show the number of years over which cumulated households’ disposable income equals the average price of a 75 m2 apartment.
Source: OECD Analytical House Price database; OECD calculations based on Eurostat and Croatian Bureau of Statistics.
Housing quality is also a concern for the most vulnerable. In 2024, over 6% of poor households (below 50% of median equivalised disposable income) lived in dwellings without a flushing toilet, a slightly higher share than on average in the OECD (5.6%). Poor thermal performance of the housing stock leaves 16% of low-income households unable to keep their homes adequately warm, creating issues of energy poverty and contributing to high energy intensity in the residential sector (see Chapter 3) (OECD, 2025[3]).
The long-term rental market is underdeveloped, contributing to low labour mobility, low productivity and labour shortages. Only 3.2% of the population lives in a privately rented or subsidised rental apartment, well below the OECD average of 25% (OECD, 2025[3]). High homeownership rates are associated with low levels of residential mobility (Figure 2.7). In combination with inadequate transport infrastructure, this is correlated with low labour mobility. In Croatia, employed workers change jobs less often than in many OECD countries and those out of work are less likely to move into jobs (OECD, 2023[4]). This exacerbates skill shortages and negatively affects productivity and growth (Causa, Abendschein and Cavalleri, 2021[5]). Low residential and labour mobility also contribute to widening inequalities, as it prevents households from finding jobs in higher‑paying regions and with access to better schools (OECD, 2021[6]).
Note: in panel B, the definition of overcrowding follows Eurostat, 2016 which takes into account households' different personal space needs depending on household members’ age, gender and relationship.
Source: Eurostat; OECD (2025), OECD Affordable Housing Database - indicator HC2.1 Living space, https://oe.cd/ahd.
Source: Eurostat; OECD Affordable Housing Database, https://www.oecd.org/en/data/datasets/oecd-affordable-housing-database.html.
Housing policy reforms are needed to ensure a more efficient functioning of the housing market and achieve affordable housing for all. In 2025, Croatia took several positive steps in this direction, including through housing taxation reforms and the adoption of the National Housing Policy Plan until 2030 (Box 2.1). To support these efforts, this chapter first discusses how to improve the efficiency of the housing stock allocation through further tax reforms. Then, it explores opportunities to expand the long-term rental market, including through reforms to improve tenant-landlord relations and investment in social and affordable rental housing for the most vulnerable. Finally, the chapter discusses solutions to streamline land use policy and construction‑related administrative procedures to improve the housing supply response in areas with high demand pressures. Policies to improve the environmental performance of the housing stock are discussed in Chapter 3.
The National Housing Policy Plan until 2030, approved in March 2025, marks the first medium-term strategy for housing policy. The strategy is built around three overarching goals: increasing the availability of affordable housing, improving housing environmental sustainability, and promoting efficient land use for residential development. Measures towards these objectives include:
Housing tax reforms, such as introducing a recurrent tax on vacant and short-term rental properties, and offering transaction tax refunds to young Croatian citizens buying their first home;
Construction of 11 200 new apartments for affordable purchase and rent under the state-subsidised housing construction programme (POS);
Incentives to activate vacant private housing and plans to convert existing underused spaces (abandoned schools, military facilities, and industrial plants) into residential units;
Legal reforms to strengthen tenant-landlord relations and to define the role and operation of non-profit housing associations;
Implementation of national energy renovation programmes targeting various building types, alongside the introduction of quality standards for new constructions;
Spatial planning improvements, including brownfield redevelopment and the use of zoning regulations to allocate quotas for affordable housing.
The total estimated cost of implementing the plan is EUR 1.2 billions, to be financed through a combination of state budget allocations, EU funds, bank loans, and citizen contributions.
Source: (MPGI, 2025[2]).
In 2025, Croatia reformed its taxation of immovable property to increase taxes on vacant and short-term holiday rental properties. Unlike most OECD countries, Croatia does not impose a recurrent tax on all immovable properties based on their value. Until 2025, recurrent property taxes were low and limited to a flat rate annual income tax on short-term holiday rentals (Figure 2.8). In addition, owners and users of immovable property pay a communal fee based on the size of the property. The revenues are used to finance the maintenance of local infrastructure. To address the high number of vacant and short-term rental properties and promote a more efficient use of the housing stock, the authorities recently introduced a new recurrent property tax only targeting vacant and short-term holiday rental properties. The new recurrent property tax is area-based, with rates set by municipalities within a range fixed by the central government (EUR 0.6-8 per square meter). The reform also increased the lump-sum tax on holiday rentals in highly touristic areas by linking the amount to a tourism development index specific to the property's location (Table 2.1).
The 2025 tax reform marks a positive step towards encouraging a better use of the housing stock, but further measures are needed to increase the system’s efficiency, reduce distortions and improve fairness. Key priorities include broadening the base of the recurrent property tax to all properties and redesigning the tax by shifting the base from area to regularly updated market values, to increase efficiency and equity in the housing market. Increasing taxes on vacant dwellings in areas with high demand will encourage an efficient use of the housing stock. Additional reforms should aim to improve tax neutrality across housing tenures and other forms of capital to reduce distortions in housing and broader investment decisions.
Revenues from recurrent taxes on immovable property, general government, % of total tax revenues, 2024 or latest available year
Source: OECD Revenue Statistics.
2.2.1. Improving the design of the recurrent property tax on immovable properties and expanding its coverage
Recurrent taxes on immovable property should be based on regularly updated market values, as previously recommended by the OECD (OECD, 2023[4]). The newly introduced recurrent tax on immovable property incorporates some value-related factors, such as the property's age, location and presence of amenities. However, it disregards other key determinants of property value—such as type, quality, number of rooms, and features like a garden or balcony—making it a weak proxy for housing value and taxpayers’ ability to pay and undermining equity. In addition, an area-based property tax system is not responsive to changes in the housing cycle, which limits its effectiveness as a stabiliser of fluctuations in the housing market (Cournède, Sakha and Ziemann, 2019[7]). There are plans to shift to a value-based system, as land and cadastral registries are modernised. This is welcome and should be accompanied by efforts to regularly update the values of the properties, for example through computer-assisted mass appraisals, as it is done in the Netherlands (Box 2.2). As regular and accurate property appraisals require high-quality data and technical expertise, it is important that the central government provides adequate technical support to local authorities. Intermunicipal cooperation can help smaller municipalities reduce costs and build capacity by pooling resources (see below).
Recurrent taxes on immovable property should apply to all properties, including owner-occupied properties and long-term rentals. This would create room to lower or eliminate more distortive property transaction taxes, which hinder housing market efficiency, discourage housing transactions and in turn negatively affect residential and labour mobility (OECD, 2022[8]). In addition, broadening the tax base would provide more resources to municipalities to undertake responsibilities, such as construction-related administrative procedures and provision of social and affordable housing. Extending the recurrent tax on all types of properties would also reduce incentives for tax evasion. The new system, which exempts owner-occupied properties and properties for long-term rental, may incentivise owners of short-term or vacant properties to declare their property as the main residence or long-term rental to take advantage of the preferential tax treatment (OECD, 2022[8]). Finally, the revenue-raising capacity of a broad tax base allows tax rates to be lower, increasing compliance.
The Netherlands offers a successful example of nationwide property tax administration. Properties are re-valued every year by local governments. The central government examines the uniformity of the valuations performed by local governments through the National Valuation Board, so that values are comparable across municipalities. Residential properties are typically assessed using the sales comparison approach, which is implemented through the Computer-Assisted Mass Appraisal (CAMA) system. Mass valuations involve the utilisation of various data sources, including the System of Register Database, information from real estate advertisements, specific data collected by municipalities and from interactions with taxpayers through online questionnaires or in the form of complaints and appeals (e.g., quality of improvements and maintenance).
Source: (OECD, 2021[9]).
The authorities could also consider taxing land values separately and at higher rates than buildings to incentivise housing construction. A split-rate taxation model with a higher tax rate on land than on structures can discourage speculative holding of vacant or underused land, encouraging construction and densification, with positive effects on housing affordability and environmental sustainability. Examples of split-rate property taxes are present at the national level in Finland and at the municipal level in the United States, in some municipalities in Pennsylvania and Hawaii. Empirical evidence shows that split-rate taxes increased the ratio of capital to land in Pennsylvania, mainly through densification (Banzhaf and Lavery, 2010[10]), and in Finland (Lyytikäinen, 2009[11]). However, split-rate taxes can be challenging to implement, as accurate valuations of land independent of its improvements can be difficult for local administrations, which often lack the necessary capacity. Moreover, their effectiveness depends on land-use policies, since they are less effective where zoning or height limits constrain housing density (OECD, 2022[8]).
As the recurrent tax on immovable property based on regularly updated values is extended to all properties, the authorities should introduce targeted taxes on vacant dwellings in high-demand areas to further promote the efficient use of the housing stock. These taxes exist in some OECD countries, such as Australia, Belgium, Canada and France. A key challenge in implementing such taxes is establishing a reliable method to identify vacant dwellings. Some OECD countries, such as France, rely on administrative and fiscal data, while others use more regulatory approaches. For example, in Belgium, a dwelling is identified as potentially vacant if the total annual water or electricity consumption - provided by distribution network operators to local authorities – falls below a certain threshold (OECD, 2025[12]). Croatia plans to identify vacant dwellings though owners’ self-declarations, similarly to Australia and Canada, supported by provided electricity bills and registered long‑term rental contracts. To ensure the effectiveness of this approach, it should be accompanied by thorough monitoring and compliance checks. For example, in Vancouver, strict penalties for non-compliance have significantly contributed to lowering vacancy rates. In contrast, the absence of strong enforcement has limited the impact of a comparable measure in Melbourne (OECD, 2022[8]).
The tax design can improve the acceptance of property taxes. Higher property taxation can be unpopular, especially in countries like Croatia where owner-occupied housing is widespread, and many property owners are low-income households. Switching to market-based property valuations could imply a steep rise in the tax bill for many households, especially since houses and apartments were often acquired cheaply during the privatisations in the 1990s and went through several waves of renovations that potentially increased their values. However, several options in the tax design could be considered to improve political acceptance. Examples from OECD countries, such as Ireland, suggest that gradually phasing-in the taxes with initially low statutory rates, and tax deferrals whereby the tax is paid only when a house is sold or bequeathed, can increase acceptance and help avoid an abrupt hike in tax bills that would hurt income-poor homeowners. In addition, allowing instalments payments, as in Canada and the United States, may help households to overcome liquidity constraints and improve tax compliance (Blöchliger and Diagne, 2023[13]). Finally, increased local revenues can improve public services, making the tax more acceptable to citizens.
2.2.2. Reducing distortions deriving from the property tax system
Other housing-related taxes (Table 2.1) should be adjusted to reduce the bias of the tax system towards owner‑occupied housing and facilitate the development of a rental market. As in many OECD countries, imputed rental income from owner-occupied housing is not taxed, and mortgage interest deductions were phased out in 2010. Gross rental income is taxed at a 12% rate with a 30% deduction for expenses. This tax design implies limited distortions in the taxation of income from immovable property between owner‑occupied and long‑term rental property. However, other property-related taxes still favour owner‑occupied over rental property and investment in real estate over other asset classes.
Transaction taxes should be phased out. Transaction taxes apply to most buyers, but younger, first-time purchasers of owner-occupied housing are eligible to apply for a reimbursement of the tax (Table 2.1). Phasing out transaction taxes for all buyers would reduce distortions between different types of buyers but also improve efficiency by removing barriers to housing transactions, supporting residential and labour mobility (OECD, 2022[8]).
Exemptions on capital gains taxes from the sale of the property should be phased out to reduce the bias towards homeownership and increase fairness. Capital gains from the sale of property are taxed at 24%, but there are exemptions on primary residences, and on secondary residences if held for more than two years. Such exemptions are generally justified by protecting people’s savings for retirement and to avoid lock-in effects, i.e., households staying in the property to avoid paying the tax. However, they create a bias towards homeownership since capital gains on other assets are taxed at rates ranging from 12% to 24%. In addition, the tax exemption of capital gains on real estate properties exacerbates regional inequalities by favouring households in large metropolitan areas, where property prices experience substantial growth on already highly valued properties, and should therefore be phased out. Potential lock-in effects could be mitigated by basing the recurrent property taxes on values as suggested above, which would limit incentives for households to remain in undervalued homes, and by taxing capital gains only at a low rate (Remeta et al., 2015[14]).
Before 2025, income from short-term holiday rentals was taxed more favourably than long-term rentals and other asset classes. Until 2024, owners of units rented on the short-term holiday rental market would only pay a yearly lump sum tax ranging from EUR 20 to 200 per bed per year, which implied an average effective tax burden on income from short-term rentals of approximately 2% (MoF, 2024[15]). The effective taxation was therefore significantly lower than the 12% rate applied to both long-term gross rental income and other capital income. This preferential treatment induced distortions to the allocation of investment across asset classes and encouraged property owners to keep a significant share of the housing stock vacant for much of the year to rent it on a short-term basis, contributing to a lack of supply in long-term rentals and worsening housing affordability. In addition, this discouraged the development of hotels or other larger facilities that would be better positioned to lengthen the tourism season into more of the year (Mikulić et al., 2021[16]; OECD, 2023[4]).
The 2025 tax reform has made progress towards reducing the tax advantage of short-term holiday rental over long-term rental properties, but remaining distortions should be addressed. The tax reform is expected to increase the tax burden of units put on the holiday short-term rental market, especially in most touristic‑developed areas, which is welcome (MoF, 2024[15]). However, the tax burden on short-term holiday rental income still varies across the country, depending on the level of tourism development in the region (Table 2.1). This means that in some areas, short-term holiday rental income will still be taxed more lightly than long-term rentals and other sources of capital income (both taxed at 12%). To address these distortions, the authorities should at least apply the standard 12% rental income tax to all short-term holiday rentals. In addition, in areas with high concentration of short-term holiday rentals and limited housing supply, municipalities should retain the flexibility to impose a local surtax and/or to restrict the issuance of licences for short-term holiday rentals, as implemented in Amsterdam, Barcelona, Copenhagen, Lisbon and Paris. Finally, evidence indicates that policies enhancing the responsiveness of housing supply to demand (discussed below) are crucial to mitigate the negative impact of short-term holiday rentals on housing affordability in the long-term (Cournède, Ziemann and De Pace, 2020[17]).
Source: MPGI.
The long-term rental market is among the smallest in the OECD. Following the privatisation of state-owned housing in the early 1990s, most households own their home, while only 1.9% of the population lives in privately rented flats and 1.2% in subsidised rental apartments. These shares are higher according to the 2021 Population and Housing Census – respectively 4.4% and 1% - but still lower than the OECD average of 17.9% and 7.2%, respectively (OECD, 2025[3]).
Expanding the long-term rental market is a key a priority of the National Housing Plan (MPGI, 2025[2]). A well‑developed rental market can improve housing affordability by providing an alternative to homeownership, especially for households - such as the young - who may face challenges in accumulating down-payments and establishing creditworthiness for a mortgage. A well-functioning rental market can also encourage residential and job mobility and can therefore boost efficient job and skill matching and productivity. Tax reforms that encourage a more efficient use of the housing stock and reduce distortions across housing tenures, as discussed above, will help to develop the long-term rental market. In addition, changes to rental regulation that better balance the rights of landlords and tenants are important to make the long-term rental market attractive option for both categories. Finally, developing the social and affordable rental housing sector is necessary to ensure adequate housing options for the most vulnerable households.
2.3.1. Improving the attractiveness of the private rental market for landlords and tenants
Private rental regulation can be improved to strike a better balance between the protection of landlords and tenants. Private rental contracts are typically open-ended. Rent levels can be freely set and renegotiated every 12 months, to a maximum level of 120% of the average market rent in the same area. Flexible rent setting is welcome as it has the potential to make housing markets more efficient and affordable in the long term (OECD, 2021[6]). However, allowing rents to be renegotiated up to 120% of the average market rent after a year, regardless of the initial rent, may expose incumbent tenants to excessive annual rent increases, reducing the attractiveness of long-term renting for tenants. In contrast, some termination rules are overly restrictive for landlords. While landlords may terminate contracts with three months’ notice for standard reasons—such as non-payment of rent or unauthorised subletting—more stringent rules apply when the landlord (or their close relatives) intends to move into the property. In these cases, termination is only allowed if the tenant has secured another suitable apartment under similar rental conditions. Such requirements may discourage investment in the long-term rental market by limiting landlords' flexibility. Finally, disputes related to rental contracts often take time to settle in general courts, averaging nearly three years (MPGI, 2025[2]). Long legal procedures create uncertainty for both landlords and tenants, making the rental market less attractive.
Tenants could be better shielded from excessive rent increases during contracts while allowing landlords to adjust rents in line with economic conditions. One option would be to continue allowing rents to be freely set for new contracts (between tenancies), while introducing predictable rules for annual rent increases during the term of the lease, for example indexing them to inflation, as it is done in some OECD countries with large private rental markets (e.g., Germany and Switzerland). Termination of rental contracts due to the owner's intention to occupy the dwelling should be permitted, without the current requirement for the tenant to have secured an alternative suitable apartment. The authorities could also consider introducing specialised courts to manage housing-related disputes as in some OECD countries, such as Australia, Canada or the United Kingdom (OECD, 2025[3]).
2.3.2. Expanding housing support for vulnerable groups
Developing social and affordable rental housing
The supply of social and affordable rental housing is limited. The 2021 Housing and Population Census indicates that 1.4% of the housing stock is owned by municipalities, which are mainly responsible for the provision of social and affordable rental housing. This is significantly below the OECD and EU averages of 7.1% and 8%, respectively (Figure 2.9). High and rising demand for social and affordable rental housing amid limited supply result in long waiting lists (European Anti Poverty Network, 2024[18]; Marčetić, 2020[19]). Reasons for the low provision of social and affordable housing primarily are the privatisation of municipal housing and a shortage of available municipal land for new constructions (Marčetić, 2020[19]). In addition, public housing support measures have primarily benefitted homebuyers, through subsidised loans and guarantees for home purchases, with limited resources from the central government dedicated to expanding the social rental housing sector (OECD, 2025[3]).
The authorities should shift away from subsidising home purchases and focus on expanding the social and affordable rental housing sector. The main programme to subsidise housing loans to younger homebuyers was phased out in 2023. This is welcome, as research suggests that housing loan subsidies have contributed to house price increases (Kunovac and Žilić, 2020[20]), in line with evidence from OECD countries (Fatica and Prammer, 2017[21]; Remeta et al., 2015[14]), and tend to be regressive since public funds mainly benefit higher-income households with access to home loans (Marčetić, 2020[19]). The government has also outlined plans to expand the share of social and affordable rental housing through the state-subsidised housing construction programme (POS) (Box 2.3) (MPGI, 2025[2]). While this is welcome, the option to provide subsidised housing loans through this programme is still in place and should be phased out.
Number of social rental dwellings as a share of the total number of dwellings, %, 2022 or latest year available
Note: for Croatia, data refer to dwellings owned by state authorities, local or regional self-governments, and dwellings owned by institutions established by state authorities, local or regional self-governments.
Source: OECD (2024), OECD Affordable Housing Database - indicator PH4.2. Social rental housing stock, https://oe.cd/ahd; Croatian Bureau of Statistics.
The central government could have a larger role in the planning and support of social rental housing. Currently, the responsibility for the provision of social and affordable housing is with municipalities. A lack of financial, human and material resources, including municipal land, reduces the ability to provide adequate supply of such dwellings. The central government could, for example, establish clear targets for social housing and better support municipalities with the construction and operation of these units. Slovenia provides a useful example. The Priority Development Areas for the Housing Supply (PROSO) tool quantifies housing needs across the country and guides national level investment in close coordination with municipalities. PROSO identifies areas with the greatest demand for public rental housing, and the government allocates at least 60% of funding to projects within these designated areas through a dedicated Housing Fund (OECD, 2023[22]).
The government is planning to use the POS programme to expand the social and affordable rental housing sector (Box 2.3), but this requires efforts to develop a non-profit housing sector. The POS financing model—based on collaboration between municipalities, central government, and commercial banks, and a revolving fund—is similar to successful models in Austria, Denmark, the Netherlands and Slovenia (Box 2.4). A share of rent payments is reinvested into the fund to maintain existing POS apartments and finance new housing projects. Plans to scale up this financing mechanism by additional state budget allocations and EU funding are a welcome step forward (MPGI, 2025[2]). However, attracting developers remains challenging, mainly due to limited financial incentives for private actors. So far, apartments built through the programme account for only 1.1% of the total housing stock. International experience shows the importance of fostering a non-profit housing sector. In Croatia, the non-profit housing sector remains underdeveloped, with only a few initiatives in major cities. Advancing this model requires new legislation that clearly defines the role and mandate of housing associations as planned, as well as capacity-building efforts. This could include training in finance, property development, and business planning—similar to the approach adopted in Australia (OECD, 2025[12]).
Eligibility for social housing could be made transferable across municipalities to promote greater labour mobility of low-income households. Access to municipal social housing is determined at the local level, and municipalities generally give priority to long-term residents (Marčetić, 2020[19]). This can create barriers for low-income individuals living in social housing to pursue employment opportunities in other localities. Making eligibility rights transferable across cities and regions, as in England’s Right to Move policy, could help address this issue. The eligibility criteria based on income should be regularly reviewed (e.g., every one to three years, in line with practices in OECD countries) to ensure priority of access to households most in need, especially given the limited supply of social and affordable housing. As the social housing stock expands, social mix could be achieved by allowing higher-income households to remain in the dwellings, with rents gradually adjusted to reflect their income increases (OECD, 2020[23]). Urban planning policies can support a balanced social mix in new social and affordable rental housing development (Marčetić, 2020[19]).
Since its introduction in 2001, the main objective of the POS (State-Subsidised Housing Construction) programme has been to facilitate homeownership by providing mortgages under favourable conditions for the purchase of POS-funded apartments at affordable prices. Every Croatian citizen is eligible, but priority is given to first-time buyers. The programme also includes a rental component, allowing for the construction of state-owned apartments to be rented to low- and middle-income households, with rents capped at 30% of household income. However, this feature remains underutilised, with rentals accounting for just 0.01% of POS units to date. The government intends to expand this dimension to boost the supply of affordable and social rental housing. POS housing is financed by municipalities, who provide land and infrastructure; the state, through the Agency for Transactions and Mediation in Immovable Properties (APN), who provides subsidised long-term loans; commercial banks; and equity contributions. The programme is funded through a revolving mechanism, with APN reinvesting loans and a share of rent repayments into maintenance and new housing development.
Source: (ECSO, 2021[24]) and APN, https://apn.hr/izgradnja-i-prodaja-stanova-pos/put-do-stana.
Some additional efforts to expand the affordable long-term rental market for low- and medium-income households are underway, but their effectiveness should be monitored and evaluated. At the end of 2025, the authorities adopted a programme aimed at mobilising vacant dwellings that have been unoccupied for at least two years to expand the long-term affordable rental market. Under this scheme, property owners would lease their vacant units to the government Agency for Transactions and Mediation in Immovable Properties (APN) for a period of 3 to 10 years and receive in advance a payment equal to the median market rent. APN would cover minor renovation costs, management services and lease the apartments to low- and middle-income tenants at below-market rates (MPGI, 2025[2]). The difference between the affordable rent and the median rent for a given unit will be covered by the state budget. Similar programmes exist in some OECD countries (i.e., Belgium, France) (OECD, 2025[12]). However, they typically offer landlords below-market rents, potentially making Croatia's programme more costly. In general, these initiatives are short-term second-best solutions as they do not address underlying issues in rental market regulation and housing taxation, that reduce incentives for homeowners to rent their vacant property on the private market. Therefore, this programme should be closely monitored and evaluated. A more effective approach for the long-term would be to introduce tax and regulatory reforms that lead to an efficient utilisation of the housing stock and enhance landlord-tenant relations as suggested above. In parallel, vulnerable households would be better supported by expanding the supply of state-owned social and affordable housing.
Reforming housing allowances
Housing allowances are limited in scope and generosity. Eligibility is restricted to recipients of the Guaranteed Minimum Benefit (GMB), the main means-tested welfare benefit, which is subject to stringent conditions. As a result, in 2024 only 9.3% of households in the lowest income quintile receive housing allowances—far below the OECD average of 25.5% (Figure 2.10). The allowance amount is also modest, at 30% of the GMB, which is lower than most OECD countries (see Chapter 1). The authorities should reform housing allowances to better support vulnerable households. Eligibility to housing allowances could be decoupled from the GMB, and the amount based on income, size and composition of the household, and housing costs, as practiced in OECD countries (OECD, 2025[3]). The forthcoming Central Register of the Population will help better target and monitor such benefits at the household level (see Chapter 1). Given long waiting times for accessing social and affordable housing, the authorities could consider giving priority to households on the waiting list for social and affordable housing, as it is the case in Belgium and Lithuania (OECD, 2023[25]).
Austria, Denmark, the Netherlands, and Slovenia have among the highest stock of social and affordable housing in the OECD (Figure 2.9). A key factor behind their success is the diversification of funding sources to build social and affordable housing, which typically include public loans, commercial debt, and equity contributions. All countries incorporate a revolving funding component, reinvesting a share of rent payments or loan repayments to support future projects—ranging from 3–7% of project financing in Austria to 12.5% in Slovenia. To limit pressure on public finances, Denmark and Slovenia operate independent housing funds outside the state budget, while Austria and the Netherlands rely on non-profit housing associations with limited public funding. In all these countries, non-profit housing associations are responsible for both the development and the daily operations of the developed housing units.
Source: (OECD, 2023[22]).
Share of households receiving housing allowance, bottom and third quintiles of the disposable income distribution, %, 2024 or last available year
Note: Quintiles are based on the equivalised disposable income distribution. Low-income households are households in the bottom quintile of the net income distribution.
Source: OECD (2025), OECD Affordable Housing Database - indicator PH3.3. Recipients and payment rates of housing allowances, https://oe.cd/ahd.
Efforts to expand housing allowances should be taken in conjunction with efforts to improve the overall responsiveness of housing supply. Well targeted and adequate housing allowances have the potential to reduce economic inequality and spatial segregation. Additionally, in contrast to social housing with non‑portable rights, housing allowances are considered not harmful to residential and job mobility. However, allowances support housing demand and, where supply is rigid, may have the unintended consequence of putting upward pressure on house prices and rents, benefitting landlords who capture a significant share of the subsidy through increased rents (Chapelle et al., 2023[26]). To benefit from their redistributive capacity, the authorities should therefore simultaneously boost efforts to improve housing supply responsiveness.
Structural reforms are needed to make housing supply more responsive in areas with high demand pressures. Efforts to make construction procedures more efficient have contributed to increasing building permits per capita (Figure 2.11, panel A). However, inefficiencies in land use policy and the limited capacity of local governments - mainly responsible for land use policy and construction procedures - continue to slow down new development. While Croatia has a sizable housing stock on average, this masks significant local disparities. Some counties face lower housing availability than others—for instance, the city of Zagreb has 515 dwellings per 1 000 inhabitants, compared to nearly 1 000 in Šibenik - which results in disparities in housing affordability across areas (Figure 2.5, panel B). The fragmentation of land ownership adds uncertainty over land rights, hindering investment for new construction where it would be most needed. In addition, high labour and skills shortages and low innovation in the construction sector contribute to high construction costs (Figure 2.11, panel B), which have become an important barrier to housing development and affordability.
Source: Eurostat.
2.4.1. Enhancing land use policy and administrative procedures
Land use policy is decentralised, with overlapping responsibilities across different levels of government, leading to inefficiencies in construction-related activities. The MPGI sets national strategic objectives for spatial development. In practice, all responsibilities are with counties, municipalities and city administrations, who issue regional (i.e., county) and local (i.e., cities, municipalities) spatial plans in line with the national strategy. Decentralisation is welcome as proximity is necessary to develop plans in line with the changing needs of the local housing market. However, weak intergovernmental coordination, overlapping mandates in the definition of spatial plans and unclear rules about amending spatial plans have often contributed to delay investment projects (OECD, 2023[27]). OECD evidence shows that overlapping competences can grant multiple authorities veto power, further delaying or preventing construction projects. This risk is particularly pronounced at lower levels of government, where local stakeholders may influence policymakers to impose restrictions that protect or enhance the value of their properties (Cavalleri, Cournède and Özsöğüt, 2019[28]).
Spatial planning is hindered by limited local government capacity and uncertainty about land ownership. Municipalities -with an average population of 6 976 and 40% having fewer than 2 000 residents - are small compared to many OECD countries. Many lack the administrative and technical resources to develop and implement local plans effectively, contributing to inefficiencies in construction (Katurić and Simov, 2021[29]; OECD, 2024[30]). Municipal capacity gaps are reflected in outdated and poorly aligned cadastral and land registries, which do not properly reflect actual property rights. The situation is exacerbated by fragmented land ownership, a legacy of post-communist land restitution, which often leaves property status unclear. As a result, investors face long, complex and costly legal procedures to establish property rights, slowing investment (OECD, 2023[27]; MPGI, 2017[31]).
The authorities should improve coordination between different actors of land use policy and avoid overlapping competences. This requires clarifying responsibilities for each body involved and formalising rules for amending county and municipal spatial plans, as previously suggested by the OECD (OECD, 2023[4]; OECD, 2023[27]). Establishing a national discussion forum, such as in Austria (Austrian Conference on Spatial Planning), Israel (Housing Headquarters), or Italy (e.g., the Conference of State-Regions; the Conference of State-Cities and Local Autonomies) can be an effective tool to bring together different planning levels and urban policy sectors.
Intermunicipal cooperation in land use policy should be enhanced. Developing joint spatial plans across several municipalities can be more effective in allocating housing and infrastructure where it is most needed and help better plan the expansion of public services (OECD, 2017[32]). It also enables pooling of human resources through cooperative arrangements or hiring shared staffing which can boost local administrative capacity. Although Croatia introduced financial incentives in 2022 to promote intermunicipal cooperation, take-up has been limited. To encourage progress, the government could consider mandating cooperation in key areas, such as spatial planning, for small municipalities below a defined threshold, as for example is done in France.
The authorities should continue efforts to harmonise land registry and cadastre data to improve transparency and streamline the construction process. In 2021, the Parliament approved the Multi-Annual Cadastral Survey Program for 2021-2030 to update and regularise property records. As of July 2024, cadastral data has been regularised in 58 out of 428 municipalities. In parallel, Croatia is stepping up efforts to integrate the land registry and cadastre, supported by the National Recovery and Resilience Plan. By 2026, the share of linked data in the Joint Information System of Land Register and Cadastre (ZIS) will increase from 4% to 60% (Ministry of Justice, 2021[33]). In addition, the authorities could work towards integrating additional information in this platform, such as the property sale prices which are currently available through tax administration records in the e-Real Estate Register, to enhance transparency (OECD, 2021[9]; IMF, 2024[1]).
The building permits process has been significantly streamlined, but bottlenecks persist. Since 2014, the process has been fully digitalised through the e-Permit system (eDozvola), which allows electronic submission of applications, serves as a one-stop shop and provides real-time updates on the application status. This has improved transparency and consistency in the process (ECSO, 2021[24]). However, according to the 2024 World Bank B-Ready survey, the median time to obtain a construction-related permit is 90 days, which is above the OECD average (67 days) (World Bank, 2024[34]). While this indicator reflects business activity (warehouse), procedures in the residential sector are typically even more cumbersome. To further streamline the process, the authorities could continue working towards full digitalisation, including by linking the e-Permit platform with Building Information Modelling (BIM) as planned, following Estonia’s example (Box 2.5). In addition, significant discrepancies between municipalities persist. For example, the median time to obtain a construction-related permit is 485 days in Split, 199 days in Zagreb and 170 days Varazdin (World Bank, 2024[34]). These disparities reflect both demand pressures and capacity constraints in local administration. Promoting intermunicipal cooperation over this competence would help free resources to hire more specialised officials.
The authorities should consider introducing “silence is consent” rules in the building permit process to reduce uncertainty and curb corruption risks. Currently, Croatia does not apply such rules, leading to uncertainty and delays that can foster corruption. According to Eurobarometer, perceived corruption in permit issuance remains high, with reports of individuals relying on personal connections or unofficial payments to expedite approvals (European Commission, 2024[35]). Croatia could adopt a “silence is consent” rule, as in France, where projects receive automatic approval after a set deadline, unless specific concerns arise (e.g., historical sites or environmental protections). Alternatively, the decision could be referred to a higher instance after a set deadline, as is the case in Austria, Portugal, and Slovenia (Costa Branco, Meijer and Visscher, 2011[36]). Finally, establishing special courts, as opposed to general courts to handle construction-related disputes, could further speed up construction projects (Palumbo et al., 2013[37]).
Estonia is a leading example of digital public service adoption within the European Union . With support from the European Union, Estonia integrated the e-construction platform (Ehitisregister) with Building Information Modelling (BIM)—a 3D model-based process that significantly advances beyond traditional 2D formats like PDFs. Unlike 2D models, 3D BIM enables the automatic generation of detailed and highly accurate construction documentation, including drawings, schedules, and material quantities. This technology allows public authorities to visualise projects in detail and proactively detect design issues, greatly reducing errors during the technical inspection of building documentation and ensuring compliance with zoning plans, laws, and regulations. As a result, the system has delivered substantial gains in administrative efficiency. A cost-benefit analysis revealed savings of more than EUR 500 000 per year and an increase of workload efficiency by about 8-10% associated with the introduction of a fully digital building permit system in (ECSO, 2021[24]).
Source: (OECD, 2024[38]), (ECSO, 2021[24]), https://www.mkm.ee/en/construction-and-residential-sector/construction/building-register.
2.4.2. Raising productivity to reduce construction costs
High costs represent an important barrier to construction projects and a key factor undermining housing affordability. Between the last quarter of 2019 and 2023, construction costs increased by 46% in Croatia compared to 26% in the EU and Euro Area average (Figure 2.11, panel B). In addition to higher cost of materials and supply chain disruption due to the pandemic, the surge in construction costs was driven by a chronic lack of skilled labour - more pronounced than in other EU countries (EC, 2025[39]) - and the increased demand for reconstruction after the earthquake in 2020 (Pavičić Rešetara, Rešetara and Lukić, 2023[40]). Low productivity and limited innovation in the sector further limit options to contain construction costs. Despite recent improvements, labour productivity remains below the OECD average (Figure 2.12). In addition, business R&D spending and total R&D personnel in the construction sector have declined significantly since 2010 (ECSO, 2021[24]), and Croatia has not filed any construction-related patent applications since 2016 (EC, 2024[41]).
Increasing productivity in the construction sector can help to contain costs. Standardised dwellings and modular construction— where building components are prefabricated offsite in manufacturing facilities before being transported and assembled onsite—offer significant potential to boost productivity. In Germany, for example, the adoption of standardisation and modular construction, informed by audits on construction costs, has contributed to keep construction costs below the EU average (Box 2.6). More broadly, increasing productivity in the construction sector will require boosting innovation, by enhancing and better targeting support for business R&D investment as discussed in Chapter 1, while also strengthening human capital, as discussed in Chapter 4. Designing and implementing a migration policy that effectively selects and integrates foreign workers where they are most needed will also be essential to fully leverage their skills (see Chapter 4). Enhancing land use regulation, as discussed above, can also strengthen incentives to invest in innovation and help raise productivity in the construction sector (D’Amico et al., 2024[42]).
Labour productivity in the construction sector, gross value added in 2020 USD PPP per hour worked, Euro area = 100, 2024 or latest available year
Source: OECD calculations based on OECD National Accounts Database.
To address rising construction costs, Germany established the Commission on Construction Cost Reduction (Baukostensenkungskommission) in 2015. The Commission developed 71 recommendations targeted at federal, regional and municipal governments, housing and construction industries, planners, researchers and others. Recommendations for policy-makers included: i) conducting a mandatory impact assessment of housing costs for all drafts of laws, regulations and standards; ii) harmonising existing building regulations, approvals and quality requirements, for instance by adopting model building regulations, iii) improving the evidence base of construction costs, drawing on completed construction projects, observation of cost influencing factors, contribution of innovative manufacturing processes; iv) setting minimum and uniform standards for social housing; and v) defining quality standards for simplification and rationalisation. The recommendations were followed up by setting up a special office to support implementation and the strengthening of standardisation and an expanding share of modular building.
Source: (OECD, 2025[43]).
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