In Focus: New Limits on Short-term Rentals

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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, […]

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New Law Limits Airbnb Rentals

Minister Lilja Alfreðsdóttir

Businesses are no longer allowed to rent out units classified as residential housing on short-term rental sites such as Airbnb. This is the result of a new law, spearheaded by Minster of Culture and Business Affairs Lilja Alfreðsdóttir, that was passed last week in Alþingi, Iceland’s Parliament, Mbl.is reports.

The law is a response to rising housing prices in Iceland and the Airbnb boom in downtown Reykjavík.

Exception for homeowners

Despite this change, owners of apartments can still rent out their units for up to 90 days a year for up to 2 million ISK [$14,300, €13,300]. “After they hit that mark, the owner can not apply for a lodging license, which has been common practice until now,” a press release from the ministry reads. “Lodging licenses will only be issued for commercial housing or units in the countryside, i.e. farm accommodation. We reiterated that homestays are always subject to registration and a license that must be renewed yearly.”

Aim to increase housing supply

The new law has the aim to boost the supply side of residential housing in and around the Capital Region, to 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,” said Lilja. “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.”

Short-term Rentals, Long-term Effects

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As the Reykjavík peninsula rumbles with volcanic activity, the world’s eyes are once again drawn to Iceland’s nature. This free publicity and the uptick in tourist visits it generates come with a price – and local renters are footing the bill.By now, Icelanders know what to expect in the aftermath of volcanic activity. When Eyjafjallajökull […]

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Reykjavík to Address Short-Term Rental Market Disruption

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The number of apartments available for short-term rental in Reykjavík has risen sharply in recent years, paralleling the increased flow of foreign tourists into the country. Many such apartments are owned and operated by companies rather than individuals. Due to a regulatory change from 2018, companies do not have to register such units as commercial properties, allowing them to evade higher property taxes and making them harder for municipalities to track. RÚV reported first.

Short-term rentals occupy entire buildings

Kristrún Frostadóttir, chairperson of the Social Democratic Alliance (Samfylkingin), voiced her concerns about the impact of short-term rentals during a question period in Parliament last week. She pointed out that many apartment buildings that had been zoned as residential were largely, or entirely, occupied by short-term rentals. This has a negative impact on the real estate market, according to Kristrún. The MP also pointed out the difficulties municipalities face due to these apartments not being registered as commercial properties.

As noted by RÚV, the regulation was altered during Þórdís Kolbrún Reykfjörð Gylfadóttir’s tenure as Minister of Tourism. Speaking before Parliament yesterday, Þórdís stated that she had considered updating the regulation but stressed the need for municipal responsibility.

“Given the recent media reports, it’s apparent that the situation is not ideal. I urge the honourable member of Parliament to consult with her peers at Reykjavík City Council about managing Airbnb activities in the capital,” Þórdís stated.

Reykjavík seeks regulatory amendment

Reykjavík Mayor Dagur B. Eggertsson described the 2018 regulatory change as problematic. He stated that it made it more difficult to track short-term rentals and enforced regulations, “especially our ban on year-round short-term rentals in residential areas. We advocate for reverting this legislation and maintain that local authorities should oversee this sector, currently managed by the district commissioner,” Dagur told RÚV.

Dagur also mentioned his intention, on behalf of the city, to formally request Tourism Minister Lilja Alfreðsdóttir to amend the regulation. “Addressing such issues, where regulations lead to unintended consequences, is a crucial collaborative effort,” he added.

Iceland Sees Surge in Approved Short-Term Apartment Rentals

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Nearly 3,400 apartments in Iceland are now approved for short-term rentals, double the number at its peak in the years before the pandemic. Homeowners are increasingly switching from non-indexed to indexed loans for refinancing.

Sharp increase in short-term rentals

Owners of nearly 3,400 apartments across Iceland have received permission for home rentals for up to three months a year. This is double the number at its peak in the years before the pandemic. 

The increase is particularly noticeable in the capital region, according to Ólafur Þórisson, an economist at the Housing and Construction Authority. “The number has increased by 70% so far this year, from about 1,200 last year to nearly 2,200 this year,” Ólafur told RÚV on Monday. “These are completely new heights that we are reaching.”

Over the weekend, labour leaders and chairpersons of tenant and resident associations in downtown Reykjavik criticised the significant increase in apartment rentals on Airbnb, as indicated by a new monthly report by the Housing and Construction Authority and a survey among tenants.

“The short-term rental market is attracting apartments that would otherwise have been used for residential housing,” Ólafur observed. “We see this trend also in a rental market survey we conducted in the autumn months. Recently, respondents have felt that the supply of suitable residential housing has been decreasing.”

Lenders gravitating towards indexed loans

But it is not only in the rental market that significant changes are noticeable. Homebuyers are shifting from non-indexed to indexed loans like never before, and prepayments of non-indexed loans have tripled in a short time.

Most of the housing loans taken by Icelanders in September were used to pay off older housing loans, not for purchasing new homes. People paid off non-indexed loans worth ISK 20 billion [$146 million / €133 million], mostly by taking new indexed loans and, to a lesser extent, by switching from variable to fixed rates on non-indexed loans.

“In historical context, the prepayments of non-indexed loans are double what the prepayments of indexed loans were after the interest rate reductions during the global pandemic,” Ólafur remarked. “And the amounts now are about ISK 20 billion [$146 million / €133 million] in September alone, just from the prepayment of non-indexed loans.”

When asked what might explain this, Ólafur stated that many non-indexed loans at fixed rates were coming up for an interest rate revision. Also, borrowers were gravitating towards indexed loans. “It is also the case that individuals who signed non-indexed loans at variable rates are moving from high nominal rates to indexed rates in increasing numbers.”

According to the aforementioned new monthly report from the Housing and Construction Authority, more balance is being achieved in the real estate market. The number of purchase agreements increased by 100 from month to month, mainly owing to young people purchasing small apartments.

Airbnbs in Iceland Used for Sex Work

architecture downtown Reykjavík houses

Airbnb operators in Iceland have on occasion requested police assistance due to suspicion that their properties are being used for sex work, RÚV reports. Chief Superintendent Grímur Grímsson says such cases are regularly brought to police but there is little they can do about them.

Thousands of properties across Iceland are available for short-term rental through the Airbnb website. It is common for sex work to be conducted in short-term rental apartments. Inflation and rising mortgage rates are leading more and more people to rent their homes through Airbnb. While some of the properties are exclusively rental properties, others are people’s homes that they rent out temporarily while they are away.

High demand for sex work

“People often inform us that they suspect that prostitution is being sold in an apartment they rent out. It seems to me that there is an incredibly high supply of this on these sites that we monitor, and that must mean that there is also a demand,” stated Grímur. He added that clients are mainly Icelanders but that the increase in the number of tourists has led to an increase in demand.

An Icelandic Airbnb host who spoke to RÚV on condition of anonymity reported finding pictures taken in their rental property on a website used by sex workers to advertise services. Airbnb’s terms and conditions state that commercial sex work is not permitted on premises rented through the site. However, how such activities can be prevented or responded to is rather unclear. Hosts are not permitted to kick out guests unless they have broken rules that are explicitly stated in the advertisement for the property, and few such advertisements state that sex work is not permitted. Airbnb advises hosts to contact the police in such cases.

Difficult for police to intervene

“We cannot intervene when it comes to making people leave the apartments,” Grímur says, adding that the issue is complicated. “Because [in Iceland] it is not forbidden to sell prostitution but it is forbidden to buy it. What we have done when we have gone into these cases where we are looking into whether prostitution is being bought [is] we are trying to interfere with those who are buying the prostitution, not the sellers.”

Grímur encouraged Airbnb hosts to avoid approving guests without several previous reviews on Airbnb as a method of preventing their properties being used for commercial activities.

Authorities Investigate Extensive Airbnb-Related Tax Fraud

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With data from Airbnb in hand, the Directorate of Tax Investigations suspects that many Icelandic residents were guilty of tax fraud between 2015 and 2018, Fréttablaðið reports. Some of the offences are considered wide-ranging and serious, with fines, and in some instances, jail sentences being considered.

Billions of unpaid taxes

At the end of 2018, the Director of Tax Investigations sent a letter to Airbnb Ireland requesting information concerning payments made to Icelandic residents. Airbnb complied with the request in August of 2020, at which point the tax authorities began their investigation. Other enquiries have, however, served to delay the Airbnb probe.

According to Theodóra Emilsdóttir, appointed Director of Tax Investigations, the ongoing probe is proceeding well, although it remains unclear how many cases will be officially investigated. In addition to a reconsideration of tax payments, the Directorate may also levy fines and, in some instances, seek jail time. The most serious cases would be sent to the district attorney and could wind up in court, which would likely conclude with fines or jail sentences,” Theodóra remarked.

Airbnb paid an estimated ISK 25.1 billion to Icelandic residents between the years 2015 and 2018, with unreported earnings likely amounting to tens of millions of króna.

Worth Ca. ISK 15 billion in 2017

In February of 2018, Statistics Iceland estimated that the total number of overnight stays in Iceland in 2017 had amounted to approximately 10,500,000, with the total number of overnight Airbnb stays amounting to approximately 1,700,00 (worth ca. ISK 14.7 billion, which was up from ISK 11.8 billion in 2016).

In 2019, Mbl.is reported that up to 70% of apartments in given streets had been registered on Airbnb, many of whom were being operated without the necessary permits.

All Building Occupants Must Approve Quarantine Rentals

Airbnb properties in houses with multiple apartments may not be rented out for quarantine purposes without the consent of all building residents, RÚV reports. This was determined by the Homeowner’s Association at the request of the Icelandic Tourist Board, which has been compiling a list of accommodations available to people while in quarantine, for example, between COVID-19 screenings upon arrival to the country.

The Tourist Board received 385 responses to its inquiry regarding quarantine-ready properties, most of which were from hotels and guesthouses. At least one respondent, however, was known to own an apartment in a multiple-residence house which they rent via Airbnb. As such, the Tourist Board reached out to the Homeowner’s Association chair and Supreme Court attorney Sigurður Helgi Guðjónsson to find out what the parameters of renting such a property for the purposes of quarantine might be. Given the risks and inconvenience posed by one occupant of a building renting out a unit for quarantine purposes, Sigurður Helgi determined that the rights of the other occupants to refuse to allow a quarantine rental outstripped those of the apartment owner to rent the property.

The Directorate of Health has set conditions for what accommodations may be used for quarantine, as well as services and assistance that may be provided to those in quarantine by the renter. The fact that so many hotels and guesthouses are prepared to meet these conditions and open their properties for quarantine use says a lot about the current market, notes Elías Bj. Gíslason, the Icelandic Tourist Board’s Director of Quality and Development.

“Naturally, everyone’s just trying to save themselves right now.”

 

Decline in Tourism Leads to Lower Rates on Rental Market, Temporarily

Reykjavik from above

Rates in Reykjavík’s competitive rental market are on the decline, a development that observers largely credit to an overabundance of unused short-term rentals for tourists, RÚV reports.

According to new data supplied by Registers Iceland, rental prices have dropped by 4.3% in the last three months, amounting to an annual decrease of 0.2%. Vignir Már Lýðsson, an economist who works for the rental guarantee service Leiguskjól, says that the decrease can be attributed to the large number of Airbnb apartments that entered the rental market when the COVID-19 pandemic began and tourism was halted.

In many cases, the owners of these properties have put them on the market at lower rates than they normally world. The rental periods offered are, however, still relatively short-term, which indicates that owners are still hopeful of returning them to the tourist market as soon as possible. “These apartments are generally fully furnished, which indicates that these are Airbnb apartments,” explained Vignir. “The parties who are renting them out have an entirely different and higher required rate of return on their owner’s equity, so these low rental rates won’t last long – these apartments will rather be sold if the tourism market doesn’t right itself.”

There are also cases where landlords have temporarily renewed long-term leases at a lower price. Because of the short-term nature of these lower renewals, this can’t be taken as a permanent change in the market, either. But lower rental market prices has led to demand for rental housing shooting up to previously unseen levels. “We’ve seen demand increase tremendously – as people see these low prices, more people are [entering the rental market] who up until now hadn’t been thinking of moving,” concluded Vignir. “These are, perhaps, people who have been living in their parents’ homes, renting with roommates, and others.”

Study Finds that Airbnb Promotes Social Inequality

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Over 60% of registered Airbnb owners in the capital area are renting properties in downtown Reykjavík or adjoining neighbourhoods. Kjarninn reports that  Airbnb properties are concentrated on six downtown streets: Laugavegur, Hverfisgata, Grettisgata, Berþórugata, Óðinsgata and Bjarnarstígur. Up to 70% of the properties on several of these streets are registered as Airbnbs.

These findings were published on Friday in a study which examines the impact of Airbnb on the housing market in the capital area. The study, a research project that Anne-Cécile Mermet, a lecturer at Sorbonne University in France carried out, in partnership with the Icelandic Tourism Board, the City of Reykjavik and the Housing Fund, found that of registered Airbnb owners in the capital area, 80% were located in Reykjavík. Of these, 37% rent out properties in the 101 postcode (Reykjavík city centre), 17% in 105 Reykjavík, and 7% in 107 Reykjavík.

As of April 2019, there were 2,567 property owners in Reykjavík registered on Airbnb, 58% of whom are operating without a legal license. The number of capital-area homeowners with registered properties on Airbnb has dramatically increased in recent years. In January 2016, there were 2,032 owners registered on the website. By January 2018, the number had almost doubled to 4,154.

The study 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 has led to property ownership being shifted to investors and business entities, in others, it has helped individuals be able to afford to remain in their homes or make ends meet.

One of the primary findings of the study was that Airbnb and short-term rentals have helped promote social inequality in the capital area. Namely, the website helps individuals who already own assets secure their foothold on the housing market. Further consequences are, of course, a reduced supply of rental properties on the market and higher prices.