March saw a record amount of apartment sales and a steep hike in housing prices, a new report from the Housing and Construction Authority states. The Central Bank of Iceland announced its decision yesterday to raise key interest rates by 0.25 percentage, the first increase in interest rates since 2018.
Record number of apartment sales in March
Never before have as many apartments been sold in Iceland in one month as in March when 1300 registered purchase agreements were signed. A quarter of these sales were over the asking price, according to a new report from the Icelandic Housing Authority.
For the eighth month in a row, more purchase agreements were made than average and the number of agreements over the past 12 months is higher than in any other 12-month period on record. Over 800 agreements were signed in the capital area, the most signed in a month since March 2007.
More demand than supply
Apartments also sell faster than before, the average sale time for an apartment in the capital area was 38 days in March and has never been shorter. The average time for apartments was 37 days and 40 for houses. The sales period was more stable in other regions, on average about 74 days in March.
The report also states that there are still signs of considerable pressure in the housing market. “In the whole country, around 25% of all apartments sold over the asking price, compared to 28% last month. This is only the second month since 2017 that 20% of housing sells over asking prices. in the capital area, around 30% of apartments sold over the asking price and around 31% of houses.
Housing supply doesn’t seem to have increased. In the whole country, just under 2000 apartments were registered for sale in the first week of May. The number of new apartments for sale in the capital area has contracted by 15% since the beginning of April but by around 57% since the beginning of the year and by around 80% since the peak of apartments on the market in late May last year.
Stronger economic recovery than expected drives interest rate hike
The Monetary Policy Committee (MPC) of the Central Bank of Iceland announced yesterday that key interest rates– the rate on seven-day term deposits – would be raised by 0.25% to 1% and that one of the reasons was the activity in the housing market. This is the first time since 2018 that the Central Bank raised interests.
The stated reason for raising the interest rates is that the economic recovery in 2020 was stronger than previously assumed. According to the Central Bank’s new macroeconomic forecast, they’re expecting just over 3 % GDP growth this year and more than 5% in 2022. The outlook has improved since the Bank’s last forecast, owing largely to signs of a stronger recovery of domestic demand. While unemployment remains high, it has eased and the slack in the economy appears smaller and looks set to close sooner than previously estimated.
Inflation has been higher and more persistent than previously expected at 3.6% in April, owing to several factors including the depreciation of the króna in 2020 and steep rises in wages and housing prices. As a result, it is necessary to raise the Bank’s interest rates to ensure that inflation expectations are anchored to the target.
Low interest only partly responsible for rising housing prices
During the interest rate decision presentation, Central Bank Governor Ásgeir Jónsson stated that in addition to low interest rates making mortgages more affordable, a significant factor in rising housing prices was the capital area municipalities’ decision not to break new land for construction, leading to a lack of supply of housing for a growing population. “The significant increase in housing prices that is happening is in some ways founded on a lack of apartment supply and city planning,” Ásgeir stated.
Still, the Central Bank’s Monetary Bulletin states that housing prices have risen less than could have been expected based on the history of the link between housing prices, disposable income, and real mortgage interest rates. Homes were not in more debt than before, leading the Central Bank to assume that the housing market wasn’t experiencing a bubble. Lower interest rates have led to an increase in owner-occupied housing but meanwhile, rental prices have fallen. “Even though house prices have risen noticeably in the recent term, they have developed broadly in line with macroeconomic fundamentals, and there are no unambiguous signs that imbalances have developed. “