Inflation Erodes Real Value of Apartments in Capital Region

Reykjavík old historic centre

The housing market experienced a decline in transactions in July, with a notable drop in new apartments entering the market in August. Despite stable nominal apartment prices, inflation and other factors have led to a decrease in the real value of housing, especially in the capital region, Vísir reports.

Housing market sees a decline in transactions

In July, there was a decrease in residential property agreements from June, dropping from 709 to 615. On average, for the current year, there have been 614 agreements made each month, compared to an average of 825 agreements per month for the first seven months of the previous year.

This data is highlighted in the latest monthly report from the Housing and Construction Authority.

Real value of housing declines

While the nominal value of apartment prices has remained stable, the housing price index in the capital region increased by 0.7% in August. Over the past twelve months, apartment prices in the capital area have risen by 2%, resulting in a real price decrease of 5.3% (assuming that the inflation rate was 7.3% over the past 12 months). The inflation rate in Iceland was measured at 7.7% in August.

In the neighbouring municipalities of the capital region, prices decreased by 1.4% month-over-month, and in other parts of the country, they dropped by 1%. The real price of apartments has decreased by 5.8% in the vicinity of the capital region over the last twelve months but increased by 0.2% in other parts of the country.

Significant drop in new apartments entering the market

In August, 240 newly built apartments were introduced to the national market, a stark contrast to the 398 in July, marking a 39.7% decrease month-over-month. In total, 2,276 new apartments have been listed this year, as per the report.

Currently, approximately 3,200 apartments are available for sale nationwide, with 1,907 located in the capital region. Of these, 622 are brand new.

“In the areas surrounding the capital, 691 apartments are up for sale, 239 of which are new, accounting for about 35% of all available apartments. Elsewhere in the country, 568 apartments are on the market, with 73 being new, representing around 13% of all listed properties.”

A growing population

The report also briefly touches upon population growth, suggesting that if the current trend continues, the nation’s population might reach 400,000 by year-end. This growth will necessitate more housing.

“Last year, nearly 3,000 new apartments were listed during the same period, while the population increased by 11,510 individuals. The average household size in Iceland over the past decade has been 2.53 residents per apartment. However, it’s worth noting that this size varies by region and settlement. Based on this average, over 4,500 new apartments would have been needed last year to accommodate the population increase,” the report states.

A quick breakdown on how inflation erodes the real value of apartments despite nominal prices increasing

Inflation refers to the general increase in prices of goods and services over time. When inflation occurs, each unit of currency buys fewer goods and services, leading to a decrease in the purchasing power of money. In other words, when inflation is high, the value of money decreases.

This means that even if the price of your apartment goes up, money buys less than it did before. In other words, the “real” value of what you own has gone down because your money doesn’t stretch as far.

Furthermore, say the nominal price of an apartment increases by 2%, but inflation for the year is 7%. This means that while your apartment’s price has gone up a little, the cost of everything else (like food, transportation, utilities) has gone up even more. So, in terms of what you can exchange your apartment for, its value has actually decreased.

More Housing for Sale and Slower Turnover Rate

iceland real estate

The number of apartments and houses for sale in Iceland continues to grow, particularly due to a longer turnover rate but also because more new apartments are entering the market. The latest monthly report from the Housing and Construction Authority states that there are currently around 1,800 homes for sale in the capital area, an increase of 300 over the past three months. The proportion of apartments sold under asking price is increasing while those sold over asking price are decreasing.

Few apartments sell within 30 days

Only 9.7% of apartments for sale in the Reykjavík capital area in mid-April were sold 30 days later. The proportion has not been so low since 2020 (with the exception of the period around Christmas and New Year last year), when the supply of apartments was significantly higher. When the apartments in the top 25% of the price range were considered, less than 5% were sold 30 days later.

In April 2023, 531 apartments were sold in the entire country, a drop from the 610 sold in March. The three-month sale average has dropped slightly following relative stability over the preceding five months. Only 321 sales were made in the capital area, lower than at any time since February 2011. Between April and May, residential real estate prices increased by 0.7% in the capital area, with apartments increasing by 0.3% and detached homes increasing by 1.9%, representing a slow down in price hikes.

Unindexed mortgage rates break the 10% barrier

Iceland’s banks have responded to inflation by raising rates, and variable unindexed interest rates on first mortgages are now in the range of 10.25%-10.50%. Interest rates have not been as high since the Housing and Construction Authority began collecting data on them at the beginning of 2010, and possibly not since such loans had any significant share of the market. Net new housing loans to households decreased in number, continuing an ongoing trend.

Number of Apartments Sold in Capital Area Hits Two-Year Low

331 apartments were sold in the capital area in October, a 22% decline compared to the previous month. The number of apartments sold in the capital area has hit a two-year low, Fréttablaðið reports.

Rising interest rates and economic uncertainty

This week, the Central Bank announced that it was raising key interest rates by an additional 0.25%. Short-term interest rates (seven-day term deposits) would thereby reach 6%. The increase, which serve to complicate wage negotiations, came in response to a month-on-month rise in inflation, which rose from 9.3% in September to 9.4% in October.

In an interview with Fréttablaðið, Ýmir Örn Finnbogason, an analyst at Deloitte, explained that rising interest rates had led to a cooling real-estate market; an update to Deloitte’s real-estate dashboard, based on statistics from Registers Iceland, showed a 22% decline in the sale of apartments in the capital area in October when compared to September.

As noted by Deloitte’s report, even though sales have declined, prices have remained almost unchanged between the months: the average price of a square metre for an apartment was ISK 709,000 ($5,000 / €4,800) October, ISK 2,000 ($14 / in €14) higher than in September.

“Rising interest rates and economic uncertainty have an obvious effect,” Ýmir Örn told Fréttablaðið. Ýmir expects the real-estate market to continue cooling over the coming months, in light of growing tensions in the economy and wage negotiations.

As noted by Deloitte, single-family homes and apartments have followed the same trend, with fewer properties being sold in both categories: the number of single-family homes sold in October compared to September declined by 16%. The average price of a square metre also declined from ISK 647,000 ($4,600 / €4,400) to ISK 624,000 ($4,400 / €4,300).

“Real-estate prices reflect consumers’ investment power, which is primarily affected by the cost of borrowing money, i.e. interest rates. And rising interest rates obviously lead to a cooling market,” Ýmir Örn stated.

As noted by Fréttablaðið, the price of apartments and multi-family homes have risen in North and East Iceland but fallen in South and West Iceland.

At Least 35,000 New Apartments Needed in the Next Ten Years

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.

See Also: Iceland’s Real Estate Prices See Highest Increase in Nordic Region

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.”

Building Blocks

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“Our city belongs to all of us. It’s so much more than a collection of buildings.” To architect Jórunn Ragnarsdóttir, a city is an organic entity, a collaboration between the architects who design its buildings and the inhabitants who populate them and traverse the streets between them. Jórunn is one of Iceland’s most respected architects […]

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Apartment Construction Hits 4.5-Year Low

iceland housing market

There have not been fewer apartments under construction in the Reykjavík capital area since February 2017, RÚV reports. If the trend continues, housing prices will continue to rise in the region. The main reason is a lack of plots, according to the Federation of Icelandic Industries (Samtök Iðnaðarins, or SI).

There are currently just under 3,400 apartments being built in the capital area. This is an 18% drop compared to the same time last year, when there were 4,100 apartments under construction. The biggest contraction is in Reykjavík, where apartment construction has dropped by 24%, and the smallest in Kópavogur, where it has contracted by 10%. Three out of every four apartments under construction in the capital area are in these two municipalities.

Read More: Iceland’s Housing Market

The combination of high demand and low supply pushes housing prices upward, which can be dangerous for the housing market. Ingólfur Bender, SI’s chief economist, stated the lack of building plots is the main issue. “That’s where the bottleneck is, as we have been pointing out for a long time. The municipal authorities have been twiddling their thumbs on this issue.” Ingólfur says the Central Bank’s decision to tighten mortgage regulations will lower demand, but supply is the root of the problem.

One-Third of Apartments Selling Above the Asking Price

architecture downtown Reykjavík houses

About a third of apartments in the Greater Reykjavík area are selling above the asking price, with the asking price for single-family homes having risen dramatically. The average selling time has fallen by 14 days over a one-year period.

The Housing and Construction Authority

According to a report from the Housing and Construction Authority published yesterday, approximately one-third of apartments in the Greater Reykjavík area are selling above the listed price. Similarly, the average selling time is decreasing: roughly 37 days in June of this year, compared to 51 days in June of 2020. The HCA has also observed a similar trend in rural Iceland, where apartments have sold in roughly 62 days compared to 89 days last year.

Fewer new apartments are being sold above the listed price when compared to older apartments. In June of this year, 50.8% of old apartments were sold under the marked price, 16.4% were sold at the marked price, and 32.7% were sold above the listed price. 23.8% of new apartments, on the other hand, were sold under the marked price, 61.9% were sold at the marked price, and 14.3% were sold above the asking price.

Roughly 33% selling above the asking price

In an interview with Vísir yesterday, Ólafur Sindri Helgason, Chief Economist with the Housing and Construction Authority, stated that, in many instances, prospective buyers have offered many millions of króna above the asking price.

“The proportion of buyers that are offering above the asking price has increased and has been increasing,” Ólafur stated. “Assets are selling quickly; the average selling time continues to decrease; and the supply of real-estate on the market is decreasing, with a 60% contraction over a one-year period.”

The number of registered purchase agreements in the Greater Reykjavík area has been at a record high, although these numbers have begun to fall below the numbers recorded in 2007. A total of 7,432 purchase agreements were registered during the first half of 2021, compared to a total of 4,915 during the same time last year. (In 2007, there were 6,622 registered purchase agreements.) “But if we look at the first six months of the year, there is still a 50% increase in the number of purchase agreements compared to 2020,” Ólafur stated.

Interest in detached, single-family homes has been especially high, which likely owes to historically low interest rates: “The cost of single-family homes has been rising dramatically and has far exceeded the price of real-estate in apartment buildings. We’re talking a 25% increase between July 2020 and July 2021, compared to a 16% increase among apartments.

Individuals have also begun to look to rural areas: “Some have begun to look for real-estate on the outskirts of the capital area, given the dramatic rise of single-family homes.”

Housing security improving

According to the report, housing security is improving among residents and so are household finances. In surveys conducted by the HCA in collaboration with Zenter, the number of respondents who state that they are experiencing housing security totaled 91.9% in May of 2021, as compared to 90.2% in June of last year.

As noted by the authors of the report, leaseholders (renters) have seen the biggest change in attitude: In June of 2019, 51% of leaseholders stated that they experienced housing security, compared to 66% this year.

Major Rent Decrease for Bjarg Tenants

apartments downtown Reykjavík housing

The Bjarg íbúðafélag housing association will be lowering the rent for a number of tenants by as much as ISK 35,000 [$280, €238] a month, RÚV reports. The rent decrease will go into effect on September 1.

Established by the Icelandic Confederation of Labour (ASÍ) and the Federation of State and Municipal Employees (BSRB), Bjarg is a not-for-profit foundation that aims to provide affordable, long-term housing for low-income families and tenants. According to new data collected by the Housing and Construction Authority, once the decrease goes into effect, rent paid by Bjarg’s tenants will be 20% cheaper than rent on the general housing market.

Bjarg has credited a recent government decision to grant favorable, long-term refinancing on the loans it received from the Housing and Construction Authority. The new lending terms will apply to loans that go toward the construction and purchase of apartments for the social good, such as in the case of a nonprofit like Bjarg. A letter of intent outlining this decision was co-signed by Minister of Social Affairs and Children Ásmundur Einar Daðason, Bjarg CEO Björn Traustason, and Housing and Construction Authority Assistant Director Anna Guðmunda Ingvarsdóttir.

Bjarg made its first apartment available two years ago and now rents around 500 units. Björn says that the foundation expects to have as many as 1,000 apartments within a few years.

The rent decrease is expected to put pressure on other apartment associations to lower their rents as well, Ásmundur Einar remarked to Vísir. “I’ve no doubt it will. This is the first time that we’ve had lower interest rates passed directly down to tenants. This is what happens with companies like Bjarg, which ensures that all profits go straight to the lessee and not to the landlords.”

30,000 New Apartments Needed to Meet Demand

apartments downtown Reykjavík housing

An estimated 30,000 new apartments are needed in Iceland over the next decade to meet expected demand. Despite a record number of apartments having been constructed last year, the demand has only increased, according to the Housing and Construction Authority.

500 more apartments than originally estimated

At the beginning of 2021, the Housing and Construction Authority published a report on housing demand in Iceland. The original report estimated that 3,950 apartments would need to be constructed by the end of the year to maintain stability in the housing market. With the population growing at a quicker rate than previously expected, however, the Authority has updated its report, revising its estimate to 4,450 apartments.

In an interview with Vísir, Karlotta Halldórsdóttir – an economics specialist with the Housing and Construction Authority – stated that the demand for housing in Iceland was relatively high. “We are constructing approximately 3,000 apartments annually, which is quite good. However, its speaks to a considerable shortage, the fact that approximately 4,500 apartments are needed this year to meet demand.” Karlotta added that this shortage did not mean homelessness but rather that young adults would be living at home with their parents for longer, or that more individuals would be residing in non-residential buildings or unauthorised housing.

A shortage of plots

According to Karlotta, contractors have complained of a shortage of building sites, which municipalities must provide. “A shortage of plots is inhibitory to the construction of apartments. It appears as if contractors are capable of building more but that the paucity of land makes it difficult.”

A record number of new apartments were constructed last year, approximately 3,800. “In reality, it’s not the pace of construction; it’s just that there is great demand these days,” Karlotta remarked. Despite this increased demand, Karlotta encouraged buyers to remain patient.

“I think it’s important for buyers not to rush. More apartments will become available. We’re seeing a rise in prices, which most likely originates with a lack of supply, but buyers should take their time, as opposed to rushing to buy.”

Increased demand for larger homes

Earlier this month, RÚV reported that Landsbankinn’s Department of Economics had predicted a 10.5% increase in real-estate prices in 2021 compared to last year. Þorsteinn Arnalds, Director of the Housing and Construction Authority, stated that this increase was to be attributed to lower interest rates. Þorsteinn added that the pandemic has seen increased demand for larger, single-family homes.

“It’s clear that single-family homes, especially larger homes, have seen a rise in prices. Maybe this owes to the increased need for better and roomier housing following social restrictions. I don’t expect this trend to change in the capital area, as we don’t expect the supply of single-family homes to increase in the immediate future; it’s mainly apartment buildings that are being constructed.

Interest-Free Loans for First-Time, Low-Income Buyers

If passed, a new bill would see the Icelandic government provide low-income buyers interest-free loans of 20% of the purchase price of their first apartment, RÚV reports. The 20% loan would not require any repayment; rather, the state would recoup 20% of the apartment price at the time of sale.

The bill was proposed by Minister of Social Affairs and Equality Ásmundur Einar Daðason. The income threshold to qualify for the loans would be ISK 7.6 million ($56,400/€50,900) a year for individuals and ISK 10.6 million ($78,700/€69,700) a year for married or cohabitating couples. These thresholds would increase by ISK 1.6 million ($11,900/€10,500) per child or teenager residing in the home.

Per the loan terms, the buyer(s) would put up a minimum of 5% of the purchase price themselves. Up to 75% of the cost would be funded by a loan from a lending institution, and the remaining 20% would come from the government. The government loan would be for 25 years and would not accrue interest or require repayment during that period unless the buyer’s income increased beyond the aforementioned thresholds for three consecutive years during the loan period.

Helping People Get Out of the Rental Market

Ásmundur Einar explained that these loans are aimed at helping people out of the rental market and that the bill represents a significant priority for him. “We are here to help people who haven’t been able to enter the real estate market, but have been stuck [renting]. Both union leadership and the business community have called for this, which is why it has formed the backbone of the government’s housing package and living wage contract.”

The loan would also benefit those who have not owned property in at least five years, thereby aiding those who lost their homes in the wake of Iceland’s 2008 economic collapse. The loans are furthermore intended to go towards new builds, explained Rún Knútsdóttir, a lawyer at the state housing association. “[T]his way, we’re actually also helping to ensure that supply increases commensurately with demand.”

If the bill passes, the government could be expected to put ISK 4 billion ($29.7 million/€26.3 million) towards these home loans in the coming years.

The full loan conditions would be as follows:

  • Loans would only be applicable for apartments in new buildings
  • Loans would only be available to purchase apartments under a specified price limit
  • Loans would only be available to first-time buyers or those who have not owned property in the last five years
  • Loans would only be available to those who cannot make a down payment and are pre-approved
  • A lendee’s mortgage repayments could not be more than 40% of their disposable income