Residential property in Croatia is already overpriced and, contrary to public belief, prices will not rise much further after the country's likely entry to the European Union, according to a leading businessman

“Prices of property have already reached higher levels than could be realistically expected. I don’t think they will rise more than five to ten percent on average after the EU entry,” said Dubravko Ranilovic, President of the Croatian Real Estate Business Association. He said foreign interest in property on the pristine Adriatic coast, together with a shortage of housing, had helped boost public belief that prices would continue to soar.

From mid-2005 to June this year rents rose 32 percent on average. A recent survey showed property prices rose on average almost six percent in the third quarter of this year alone.

The average price of a square meter of housing space is 1,935 euros ($2,553). The average net monthly salary is about 4,500 kuna ($810), so the strong credit expansion the central bank has been battling for years is hardly surprising.

“We are not building enough flats. There is no real housing policy and everything is regulated by the market, where demand is stronger than offer. That pushes prices towards exhausting levels,” Ranilovic said.

But he added: “This year we have seen fewer transactions on the property market, which means the prices are exaggerated.”

Many Croats fear that wealthy foreigners could gobble up local property once transactions are fully liberalised in line with EU standards, and Ranilovic said there should be transitional arrangements for some areas after Croatia joins the EU, possibly around 2010.

“Croatia must seek to protect agricultural land and rural property which is still rather cheap. Also, those who buy second homes in old hearts of towns should be forced to live there regularly or rent it, to prevent such culturally valuable places from becoming void,” he said.

Despite strong western European interest in property on the Adriatic coast, Ranilovic said the number of properties being sold was well below what might be expected.

“Those who seek second homes encounter prices well beyond their expectations based on similar type of property in other Balkan or east European countries,” he said, adding investors were also deterred by bureaucracy, inefficient property agencies and lack of urban planning.