An economist in Arion Bank’s research department says it is an oversimplification to claim that too many apartments have been built in the capital area.
The state of the Icelandic real estate market is, in the opinion of Kári S. Friðriksson, an economist in Arion Bank’s research department, very interesting, as its development has been different than expected due to external circumstances. “The number of purchase agreements so far this year is considerable, and therefore there is quite a lot of life in the market.”
What makes the situation so interesting is that at the same time as sales have been strong in the capital area, the supply of apartments for sale is increasing dramatically. “Although sales are strong, they are not strong enough to fill the gap. New apartments have been coming onto the market rapidly in considerable quantities this year and they seem to be selling slowly. It is interesting that despite the sufficient supply of apartments in the capital area, apartment prices have continued to rise. It is no less interesting in light of the fact that in recent months, although that is now turning around, indexed interest rates have been rising and real interest rates have been high for quite some time. Under such circumstances, one would have thought that apartment prices would ease a little.”
When looking at the supply and demand for residential housing, the number of apartments for sale and the number of those built is often considered. However, it is important how the apartments are built and at what price they are then sold.
“This is not a homogeneous product. The population in this country has increased very rapidly in recent years and the number of people living in each apartment is decreasing. The underlying forces continue to call for more apartments, but supply, demand and price are the most important factors. Urban planning is important in this context and despite the fact that there is an excess supply today, I do not believe that too much has been built in recent years, especially when looking at the long-term development of the underlying dimensions.”
The current situation is more likely explained by temporary market conditions and discrepancies in how apartments have been built, compared to what people are demanding.
“At the same time, the price difference between comparable new and older apartments is greater than it has often been in the past, despite the fact that apartment prices have risen sharply in recent years. I therefore believe it is an oversimplification to say that too many apartments have been built,” he says, adding:
“Many new apartments that are entering the market are different from older apartments, for example in terms of the number of parking spaces. Often there are few parking spaces that come with new apartments and in some cases none. It may be that this is reducing people’s interest in new apartments. As can be understood, new apartments are priced higher than comparable older apartments and although people are starting to stretch their budgets higher when buying apartments, they are still unable to finance the purchase of new apartments. As it stands, there is plenty of supply for sale, both of new and older apartments, but the interest in older apartments simply seems to be greater at current prices.”
As a result, developers may have to lower the price of new apartments that are having a hard time selling in order to get them out.
The matter is discussed in more detail in Viðskiptablaðið. Subscribers can read the full story here.
