In May, Iceland’s Parliament passed an amendment aiming to limit short-term rentals in the Southwest region. The legislation bans businesses from renting out units classified as residential housing on short-term rental sites such as Airbnb. The amendment is a response to rising housing prices in the country and an Airbnb boom in downtown Reykjavík. So, what do the changes exactly entail, and how do they impact businesses, local renters and homeowners, and tourists?
A chronic problem
Ensuring enough housing supply for a growing population has been a persistent challenge in Iceland. Between 2011 and 2021, the country’s population increased by nearly 15%, but construction of new apartments remained below historic averages. During the COVID-19 pandemic, authorities’ response measures enabled many first-time buyers to enter the housing market, and as demand increased, supply did not, leading to dramatic rises in real estate prices. Between the summers of 2021 and 2022, residential housing prices in Iceland skyrocketed, peaking with a 25% jump.
The market has cooled off somewhat since then, but the shortage of homes for a growing population remains a problem. Construction of new apartments remains below government targets while demand continues to increase. The indefinite evacuation of residents from the town of Grindavík, Southwest Iceland due to volcanic activity has led to an additional surge in demand for housing across the region. Grindavík residents number around 3,600, nearly 1% of Iceland’s total population.
Today, a significant portion of the residential units available in the Southwest region are rented to tourists through short-term rental platforms such as Airbnb, and the number has risen in recent years. In November 2023, the Housing and Construction Authority reported that 3,400 apartments in Iceland were approved for short-term rentals for up to three months per year, double compared to the pre-pandemic record.
Last year, it was reported that many of these units did not belong to individual homeowners, but rather businesses, who had bought up large swathes of apartments as investments in order to rent them out short-term to tourists. Some apartment buildings in Reykjavík that had been built in recent years to tackle housing shortages for locals had been almost entirely occupied by business-run short-term rental units.
These and other factors have led to a chronic housing shortage in Iceland, which most strongly impacts low earners, renters, and immigrants.
A study published in 2019 found that Airbnb and short-term rentals had exacerbated social inequality in the Reykjavík area. Namely, the platform helped individuals who already owned assets to further secure their position in the housing market. Other consequences were a reduced supply of rental properties on the market and higher prices. At the time of the study, there were 2,567 property owners in Reykjavík registered on Airbnb, 58% of whom were operating without a legal license.
The study also showed that homeowners who rent out their properties on Airbnb are not a homogeneous group of people with a homogeneous set of goals and/or business practices. Therefore, the consequences of these individuals renting their properties vary. While in some cases, Airbnb had led to property ownership being shifted to investors and business entities, in others, it had helped individuals afford to remain in their homes or make ends meet.
The study was carried out by Anne-Cécile Mermet, a lecturer at Sorbonne University in France, in partnership with the Icelandic Tourism Board, the City of Reykjavik, and the Housing Fund.
Before and after the amendment
Between 2010-2015, the number of foreign tourists in Iceland increased by nearly 20% per year. Between 2015 and 2016, it jumped 39%. The demand for short-term accommodation rose in proportion, and short-term rental of private properties grew in response to that demand. To regulate this proliferation of short-term homestays, Iceland passed an amendment to the Act on Restaurants, Lodging and Entertainment that took effect on January 1, 2017.
Since 2017, to rent out a property short-term (including through platforms such as Airbnb) owners of residential housing must apply for a homestay permit. This includes owners renting out their primary residence and those renting another unit in their ownership. The permit costs ISK 9,200 [$66, €61] and must be renewed annually. In each calendar year, permit-holders may rent out up to two units for a cumulative maximum of 90 days and a maximum income of ISK 2 million [$14,300, €13,300]. Income earned through short-term renting is taxed as financial income (at 22%), is not eligible for any tax deductions, and must be declared on tax returns. Additional rules on the size and type of units, the number of guests, and safety considerations apply.
The newly passed amendment does not change any of these regulations. Homestays are still subject to a permit that must be renewed annually. As before, owners of residential housing can rent out their units short-term for an annual maximum of 90 days and a maximum income of ISK 2 million. However, the amendment stipulates that after they hit that limit, they cannot apply for a lodging license, which has been common practice until now. Unlike homestay permits, lodging licences are issued indefinitely, that is to say, they are not subject to annual renewal, and though they have differing requirements from homestay permits, they are not subject to the same income or 90-day limits. The new amendment stipulates that lodging licenses will now only be issued for commercial housing or units in the countryside (i.e. farm accommodation).
The amendment aims to boost the supply of residential housing in and around the Reykjavík capital area and meet increased demand for housing. “With this change, the difference between residential and commercial housing will be clearer when it comes to accommodation and we’re looking at the actual use of the units,” stated Minister of Trade, Tourism and Culture Lilja Dögg Alfreðsdóttir. “It’s no longer possible to buy urban residential housing and rent it out for more than 90 days, like we’ve seen in downtown Reykjavík where even entire apartment buildings have been turned into hotels.”
Potential challenges
Ideally, the updated legislation will lead to an increase in the supply of both rental housing and housing for sale in the capital area and the Southwest region, which in turn could lead to lower prices. Ensuring the legislation is adhered to requires significant monitoring, however. In recent years, the Ministry of Tourism has funded a supervisory body called the “Homestay Watch” (Heimagistingarvakt) to the tune of ISK 50-70 million [$360,000-504,000, €333,000-466,000] per year. The watch’s monitoring has resulted in the government’s increased overview of the actual scope of homestay rentals. However, authorities may also need to act to ensure unregistered rentals don’t proliferate – and that businesses do not discover new loopholes they can exploit at the expense of renters and would-be homeowners.
