Housing Prices Drop, Indicating Potential Cooling of Market Skip to content
iceland housing market
Photo: Golli.

Housing Prices Drop, Indicating Potential Cooling of Market

A recent report by the Housing and Civil Engineering Agency may indicate a cooling in Iceland’s housing market.

According to the report, the housing price index has fallen by some 0.4 per cent since last month. Although the change is a relatively humble one, the housing index has not decreased on a month-by-month basis since 2019.

Read more: Housing Prices Highest in Decades

Forecasts predicted a cooling in the housing market, given the recent hike in interest rates. Currently sitting around 7 per cent, the interest rate hike was in response to recent inflation, with the goal of de-incentivizing borrowing to cool off markets. The measures seem to be having an effect, although the high interest rates have made the Icelandic housing market especially difficult to enter for first-time home buyers.

Read more: Mortgage Payments to Continue Rising in Iceland

Una Jónsdóttir, director of Landsbanki’s financial department, stated in an interview with RÚV that “this means that we can fully expect inflation to subside faster than we had originally assumed. Inflation has become very high and housing is one of its main drivers. So a sign of cooling in the real estate market will mean that inflation will go down faster.”

Additional tightening of lending rules has also contributed to the contraction. “It is quite likely that key interest rates will continue to rise,” continued Una, “because we are nevertheless seeing very high inflation. Although there are some clear signs that the real estate market is starting to cool down, the underlying inflationary pressure remains very high. We have to try to get inflation down properly, and in order for that to be possible, interest rates definitely have to be raised somewhat further. We are at well over nine per cent inflation right now for the next few months, and the Central Bank’s inflation target is two-and-a-half per cent.”

Read more: Key Interest Rate Raised to 5.5% in Iceland

housing market in iceland
Data from Registers Iceland

Shown above is the average purchase price for an apartment in the capital region. This year alone has seen explosive growth, with prices rising in excess of ten per cent compared to last year.

Nevertheless, Una cautions patience for those who bought at the peak, stating that home-buyers have little to fear: “It’s only one month and it’s not a huge drop. Housing prices have risen a lot and are still quite high. So I don’t think this should have any major impact on those parties,” she said.

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