When inflation rises, interest rates fluctuate, and the value of money falls, capital seeks a safe haven. Real estate has been the primary answer to this question for decades — a tangible asset with limited supply, which cannot go bankrupt and, in the worst case, still exists as a physical object. But are these assumptions still valid in today's economic environment? And does the strategy of protecting capital through real estate work equally well for all buyers, in all locations, and at all entry prices?
TL;DR
Real estate has been a good protection against inflation for decades, but this connection is not automatic — it depends on location, entry price, and financing method.
The rise in interest rates in 2022–2023 cooled some European markets, but Croatia remained resilient due to specific factors (eurozone entry, foreign buyers).
Real estate protects capital only if purchased at a fair price, in a location with fundamental demand, and without excessive debt.
Besides real estate, other asset classes also come into consideration — each with a different profile of liquidity, risk, and return.
What "capital protection" means and why real estate has played that role
Capital protection in an investment context means one thing: that the real value of an asset does not fall faster than the purchasing power of money.
This is not the same as high yield — capital protection is a conservative strategy whose primary goal is preservation, not multiplication.
Real estate has historically performed well in this role for several reasons: supply is structurally limited (land is not produced), demand is fundamental (housing is an existential need), and the value of tangible assets is more resistant to monetary erosion than the value of cash deposits. During periods of high inflation, rents tend to rise with the general price level, partially compensating the property owner for the decline in purchasing power.
Inflation and real estate — what is the actual relationship
A link between inflation and rising real estate prices exists, but it is neither mechanical nor always linear.
In the period 2021–2023, when inflation in the Eurozone reached levels not seen for decades — in Croatia, annual inflation in 2022 exceeded 10 percent — real estate prices in attractive locations grew in parallel with or faster than inflation. Zagreb and Split recorded annual price increases of 10 to 15 percent during that period, which effectively preserved the real value of assets for buyers who entered earlier.
However, inflation alone is not a sufficient reason for a property to increase in value. Locations without fundamental demand — smaller regional centers, properties with poor infrastructure, objects requiring expensive renovation — can stagnate or lose value even in an inflationary environment. Capital protection through real estate does not automatically come with the purchase of just any property.
What happens when interest rates rise
The European Central Bank raised its key interest rate from zero to 4.5 percent between July 2022 and September 2023 — the fastest monetary tightening cycle in the modern history of the Eurozone.
The consequences for the real estate market were visible across Europe: in Germany, Sweden, and the Netherlands, real estate prices fell by 10 to 20 percent in nominal terms, and transaction volume dramatically decreased.
Croatia experienced this reaction considerably milder.
Several factors explain this resilience:
- Entry into the Eurozone at the beginning of 2023 attracted a new wave of foreign buyers who had previously hesitated due to currency risk
- A strong tourism sector maintains demand for coastal properties regardless of the interest rate environment
- A high proportion of purchases without credit financing, especially in the segment of expensive properties — buyers who do not rely on a mortgage are not exposed to rising interest costs
This does not mean that the Croatian market felt no pressure — transaction volume slowed, and buyers' negotiation space slightly expanded — but no nominal price drop occurred.
When real estate does not protect capital
The strategy of capital protection through real estate can be ineffective or even counterproductive in several scenarios that occur more often than investors assume:
- Buying at a premium at the peak of the cycle — entering the market when prices have already absorbed all optimism leaves little room for real growth
- Wrong location — a property in a demographically empty area or without an economic hinterland does not track inflation, regardless of macroeconomic trends
- High credit financing — an investor who finances 70 to 80 percent of the purchase price with a variable-rate mortgage is exposed to a double risk: rising borrowing costs and a possible decrease in asset value
- Low liquidity as a trap — in crisis situations when capital is needed quickly, real estate can be difficult to sell at a fair price in the short term
Alternative strategies and how real estate compares
Real estate is not the only asset class used for capital protection.
A comparison with alternatives helps to understand its specific role:
- Gold — historically the longest-standing form of protection against monetary erosion, but it does not generate income and is subject to short-term volatility
- Inflation-linked bonds (TIPS, Eurozone inflation-linked bonds) — directly linked to the inflation index, but with lower returns and no capital growth
- Stocks — outperform inflation long-term, but with higher volatility and psychological pressure from market oscillations
- REITs (Real Estate Investment Trusts) — offer exposure to the real estate market with high liquidity, but without direct control over the asset and with a correlation to stock markets
In this comparison, real estate stands out with a combination of tangibility, income generation (rent), and relatively low correlation with financial markets — but at the cost of lower liquidity and a higher entry threshold.
What to check before buying "for capital protection"
A buyer considering real estate primarily as protection against inflation and monetary erosion should check several key parameters:
- Fundamental demand in the location — is there a permanent reason why someone would want to live or reside in that location regardless of investment trends?
- Price-to-rent ratio — if the market value of the property is divided by the annual rental income, you get the so-called gross yield; below a 4 percent gross yield, capital protection through rent becomes questionable
- Share of own capital — the smaller the share of credit financing, the more resilient the property is to interest rate shocks and market corrections
- Entry price relative to the market average — buying below or at the market average provides a protective cushion; buying significantly above average removes that cushion
FAQ
Is now the right time to buy real estate as capital protection?
There is no universal "right moment" that applies to all locations and all buyer profiles. In markets like Zagreb and Split, where fundamental demand remains strong and supply is limited, buying at any phase of the cycle with a long-term perspective has historically proven justified. The key is not to enter with excessive credit financing and not to buy solely based on short-term trend stories.
How much capital needs to be immobilized for protection to be meaningful?
An investment in real estate is meaningful as a capital protection strategy only when the amount being protected justifies transaction costs and illiquidity. With transaction costs of 4 to 5 percent and the need for a long-term horizon, real estate as a capital protection instrument makes sense for amounts of 100,000 euros and above — below this level, more liquid instruments may be more effective.
Does a tourist property protect capital better than a residential one?
A tourist property in an attractive Adriatic location offers potentially higher rental yields but also entails higher operating costs, seasonal income, and regulatory risks (short-term rental restrictions are becoming a common topic in European metropolises and coastal areas). A residential property in an urban center provides more stable, predictable income with lower operating costs — which is often better aligned with a conservative capital protection strategy.
How do interest rates affect the value of a property where there is no credit financing?
A property owner without a mortgage is not directly exposed to rising interest rates through borrowing costs. However, indirect exposure exists: rising interest rates reduce the purchasing power of credit-financed buyers, which can slow growth or temporarily lower market prices. For a long-term investor with a paid-off property, this is generally a short-term correction, not a structural risk.
Regent, as a real estate agency, regularly advises clients who consider real estate as a long-term strategy for capital protection and growth. From analyzing location fundamentals to assessing real returns, we are available for a no-obligation consultation.
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