Iceland needs to build 3,500 to 4,000 apartments a year in order to stabilize the housing market, RÚV reports. The last few years have seen a boom in housing construction, but this has recently slowed, possibly due to pandemic-related factors. Even if construction picks up again, however, market observers believe more aggressive action is needed to stabilize the market in the short-term.
The local housing market gradually recovered after the 2008 financial crash, and the last three years in particular have seen considerable development. In 2021, a record 3,800 apartments were built. Even so, housing prices in Iceland have risen faster than anywhere else in Europe, driven up by the dwindling supply, as well as increased purchasing power and low interest rates.
New population projections from Statistics Iceland have thrown the housing shortage into stark relief; the country is growing at a faster rate than previously projected, which means that it’s imperative that Iceland have more housing as soon as soon as possible. “In our opinion, and the opinion of local municipalities, roughly 35,000 apartments will be needed in the next ten years,” said deputy director of Iceland’s Housing and Construction Authority (HCA) Anna Guðmunda Ingvarsdóttir. But instead of construction picking up to meet this demand, it’s actually slowed.
“Instead of around 3,000 apartments being built this year and next,” explains Anna Guðmunda, “we’ll have around 2,800-3,000. When what we really need is to be building 3,500 apartments—or better yet, 4,000.”
Reason for stall is uncertain, but could be pandemic-related
The exact reason for the housing construction slow-down at a time when demand and prices are at their highest is a bit of a mystery. Many have suggested that there are simply not enough plots available for new builds, but according to the HCA’s data, this doesn’t seem to be the reality.
“The land issue […] is not as big a problem as has been suggested,” said Anna Guðmunda. “As an example, [the HCA] compared capital-area municipal associations’ development plans. We found that it would actually be possible to build 14,001 apartments now, provided that the plots are actually fit for construction and that those who own the plots are ready to get started. So what’s really holding things up—that’s something we need to take a closer look at.”
This analysis is in line with editor and Kjarninn journalist Jónas Atli Gunnarsson’s findings. “If you look at the statistics, there’s not really a shortage of plots,” he explained. “A lot of construction permits have been issued over the last three years, but hundreds of them are still unused. If that was the real estate market’s main bottleneck, all these permits would be new.”
“It could be the pandemic,” he continued. “We’ve had various economic downturns over the last two years and uncertainty about the economy reduces investors’ willingness to put money into developing residential properties. Then there is the supply chain breakdown, which reduces the number of construction supplies we get, and then lockdown protocols have reduced construction activity because people haven’t been able to come to work. So there are a lot of reasons why people aren’t building.”
No quick fixes
Even if there is a boom in construction, it will still take years for the market to fully recover, Jónas Atli continues.
“We’ve had this hiccup in the construction market—it takes so long to build apartments. So even though construction is booming now, it will take two years for new builds to go on the market. If demand remains this high in the meantime, we’ll continue to have this tension.”
Jónas Atli believes that in order to stabilize the market, municipalities should focus their attentions on construction, while the government and the Central Bank should work on slowing demand.
“This is done by lowering the maximum loan-to-value ratio, it’s also done by raising interest and maybe by setting limits where people can only buy maybe two or three apartments as investments. But these aren’t popular measures.”
And no matter what, there are no quick fixes to this situation, Jónas Atli continues.
“Unfortunately, any quick fixes wouldn’t work in the long-term. There is only one good solution, and that’s the long-term solution: building more.”