Common Questions About Iceland

The Icelandic flag

Where is Iceland?

Iceland is an island located in the North Atlantic Ocean. It sits directly on the Mid-Atlantic Ridge and comprises two major tectonic plates, the Eurasian and North American. Coupled with the volcanic hotspot underneath the island, this results in frequent earthquakes and volcanic eruptions.

How big is Iceland, and how many people live there? 

In terms of area, Iceland is about 103,000 square kilometres [39,769 square miles]. In population numbers, Iceland is the size of an average European city, with around 400.000 inhabitants. Most of those live in Reykjavík, the capital of Iceland, or the surrounding area. 

How Do I Get to Iceland?

There are two ways to travel to Iceland. You can fly with one of the numerous airlines that fly there or you can sail with M/S Norröna, a ferry that offers weekly fares from Denmark to the east of Iceland. Additionally, numerous cruise ships offer trips to and around the island. 

Is Iceland Expensive?

For most people, Iceland will be more expensive than their home country. The cost of living is high, and there are some things in particular, such as alcohol, eating out, and planned tours, that are very expensive. The good news is that there are also many free attractions to enjoy! If you‘re here on a budget, skip the planned tours and just head out on your own. Couple that with an Airbnb, where you can cook your own meals, and you‘ll save yourself considerable amounts.  

Do people tip in Iceland? 

It‘s not the custom in Iceland to tip. Some restaurants and coffee shops have jars for tipping, but as customer service wages in Iceland are good, this is not something you should feel obligated to do.

Is Iceland cold? 

Judging by the name, one might think Iceland is extremely cold and covered in snow all year round. This is not the case at all! Over the year, temperatures usually fluctuate between -10 °C [14 °F] and 20 °C [68 °F], with the coldest month being January and the warmest July. Storms, often accompanied by snow or rain, are frequent from September to March. Wind and precipitation are less common during summer, and if you‘re lucky, you might even catch some excellent sunny, warm weather days.

Is Iceland safe? 

Yes, it is. In fact, for 14 years in a row, Iceland has been ranked number one on the Global Peace Index

Are Icelanders LGBTQ+ Friendly?

Iceland is considered among the most LGBTQ+ friendly countries to visit, and the Icelandic people are usually very open and accepting towards LGBTQ+ communities. Reykjavík Pride, a week-long annual celebration held in August, attracts tens of thousands of people. 

What is the best time of year to visit Iceland?

Well, it depends on your preferences. Do you crave bright and magical summer nights or the cosy darkness of winter? Would you like a chance to encounter a blizzard and see the northern lights, or do you wish to experience the extraordinary Highland, spot some whales and visit remote fjords? In Iceland, each season has something unique to offer!

 

Collective Agreement Negotiations Suspended

vr union iceland, Ragnar Þór Ingólfsson

The labour movement cannot drive down inflation alone, the chairman of Iceland’s largest labour union told Vísir. He says wage negotiations have been put on hold due to announced municipal fee hikes as well as what he calls the government’s inaction. Inflation has measured 8% over the past 12 months in Iceland and rose by 0.1% last month.

The aim of labour and business representatives was to complete a new collective agreement by January 31, when the current short-term agreement expires. It is customary for Icelandic municipalities to announce changes to their fees annually, and these changes normally take effect on January 1. VR Union Chairman Ragnar Þór Ingólfsson says unions will have to re-examine the situation once these fee changes have been confirmed, but say that municipalities have proposed fee hikes between 5-30%.

“It’s just a grave situation,” Ragnar Þór stated. “We are going backwards. The government regarding housing issues, regarding fee hikes. We are seeing the cost of living index rise and prices rise. There is upward pressure everywhere. That all somehow works against a good result being reached in the wage negotiations. So all we can do is wait. We can’t be trying to do something alone on some boat in the middle of the ocean when no one is going to participate.”

Annual Inflation Rate Dips Below 9% for the First Time in 12 Months

currency iceland

The annual inflation rate currently sits at 8.9%, marking the first time that it falls below 9% in 12 months, RÚV reports. The decrease is to be attributed to the elimination of inflation measurements from June of last year – during a month when inflation rose from 7.6% to 8.8%.

Attributed to the elimination of July 2022 figures

The annual inflation rate (as measured by the annual change in the consumer price index) declined over the past month and was registered at 8.9% by Statistics Iceland in June, RÚV reports. The annual inflation rate in May was 9.5% compared to 9.9% in April.

Despite the inflation rate declining, the consumer price index (month-on-month) rose by 0.85% compared to the previous month. Notably, the cost of living in personal residences saw a 1.6% increase, while the price of hotel and restaurant services rose by 1.5%. (See table below from Statistics Iceland.)

As noted by RÚV, the current lower annual inflation rate, despite the rise in the consumer price index, can be attributed in part to the superannuation of inflation measurements from June of last year, when inflation rose from 7.6% to 8.8% – marking the most significant single increase in recent times.

In February, the annual inflation rate reached its peak at 10.2%. It has hovered above 9% since July of last year.

Website for Comparing Grocery Prices Launches in Iceland

Verðgáttin

A new website where consumers can compare the prices of food items in three major grocery chains in Iceland has officially launched. The website features around 80 food staples and prices are updated daily. RÚV reported first.

Verðgáttin, as the website is called, shows the prices of products at three major grocery chains: Bónus, Krónan, and Nettó. Products include basics such as butter, bread, vegetables, fruit, and meat products where each brand is compared across all three chains. A browse through the prices reveals that for many products, the difference is no greater than a single króna: cream, for example, costs ISK 709 at Bónus but ISK 710 at Krónan and Nettó. The difference is more dramatic for a loaf of bread from the producer Mylla, however, sold at ISK 455 in Bónus but ISK 556 at both Krónan and Nettó. Grocery stores submit prices to the website daily, meaning that consumers will also be able to see the price changes over time.

While inflation measured 10.2% in Iceland over the past year, the price of many food staples has risen at higher rates. The price of dairy products, for example, rose 16% over the past year.  On Monday, the government of Iceland introduced a series of measures to fight inflation, a combination of spending cuts and tax hikes, as well as reducing the salary increases of senior government officials.

The website is part of an agreement between businesses and the Icelandic Centre for Retail Studies (Rannsóknarsetur Verslunarinnar, or RSV) to closely monitor the development of the price of essential consumer goods and was partially funded by the Ministry of Culture and Trade.

More than 4,000 Apartments Needed to Meet Housing Demand

apartments downtown Reykjavík housing

According to the latest report of the Confederation of Icelandic Industries, it is expected that in the next three years, there will be 4,360 fewer completed apartments entering the market than the estimated demand requires.

According to the forecast, a total of 2,800 completed apartments will enter the market this year. By comparison, approximately 3,800 completed apartments entered the market in 2020, followed by a decrease to around 3,200 in 2021, and then approximately 2,800 last year.

Read More: Difficult for First-Time Buyers to Enter Market

The recent report also predicts further contraction in 2025 and 2026. Looking further ahead, 2,800 apartments are expected in 2024, but in 2025 and 2026, the number will be no more than 2,000 per year given current trends.

However, given the current rate of population growth, it is estimated that there will be a need for 4,000 completed apartments this year and in the following two years. The accumulated deficit in supply and demand for new properties for the years 2023-2025 is projected to be 4,360 apartments.

Since the national agreement between the government and municipalities regarding the construction of 35,000 apartments over the next ten years was signed in July last year, the cost of average apartments has increased by approximately 7 million ISK [$50,000 USD, €46,000]. Interest rates have also driven housing prices up recently, and additionally, the cost of materials and labor for construction has increased by 2.6 million ISK [$18,000 USD, €17,000] during this period. An expected reduction in the tax incentives for construction will also increase the cost of apartment construction by an average of 1.2-1.5 million ISK in the coming years.

Read More: 35,000 Apartments to be Built in 10-Year Housing Plan

Given current trends, the report concludes that it is unlikely that the government’s target of constructing 35,000 new completed apartments within the period of 2023-2032 will be achieved unless the authorities take decisive action and intervene in the matter.

The recent report does, however, offer several recommendations. First and foremost, they suggest that the government should reconsider the proposed reduction of the tax refund for real estate developments.

The association also suggests that municipalities significantly increase the supply of plots and review the collection of fees before starting developments. “Last but not least, coordinated efforts by the government, municipal associations, the Central Bank, and labour market participants are needed to reduce inflation and inflation expectations, as this will create a foundation for lower interest rates,” the analysis states.

With Rising Life Expectancy, Pension Benefits Lowered by 10%

retire in iceland

As of July 1st, the Pension Fund for Icelandic State Employees (LSR) will lower its benefits by approximately 10%. In an announcement on the benefit cut, LSR stated that it was in part due to rising life expectancy.

The Ministry of Finance and Economic Affairs released new life expectancy tables at the end of 2021, which assume that Icelanders will live considerably longer than previously estimated, and that younger generations will have a longer life expectancy than older generations.

Read More: Cabinet to Receive 6% Raise Amid Inflation and Interest Hikes

“Someone who is in their sixties today will live two years longer than previously estimated. But someone who is 25 years old today is expected to live four years longer than previously estimated,” stated Harpa Jónsdóttir, Executive Director of LSR. She continued: “And the thing is, we are still going to pay for the same length of time, but there is no additional money coming into the pot. So, we just need to take the same money and spread it over more years.”

Pension funds must now adapt to these changes and anticipate paying pensions for a longer period than previously calculated. On average, these changes will result in a decrease of 9.9% in the monthly entitlements of those currently contributing to the fund. For those that receive pensions from the fund and do not have state insurance, the payments will decrease by 4.1% from July 1st of the upcoming year.

Read More: Central Bank Raises Key Interest Rates by 1.25%

The changes will apply to those who will receive payments from the fund in the future, while the entitlements of those who already receive payments from the fund will decrease by about 4%.

According to LSR, “the reduction in rights and pension payments is a significant measure for the fund but is nevertheless necessary given the current situation.”

 

Why are the prices so high in Iceland?

Why is Iceland so expensive?

Iceland is relatively expensive compared to many other countries but on the other hand, the average salary is higher than in most other countries. There are several reasons for Iceland’s high prices, including a small market, oligopoly, high reliance on imports, geographical isolation and high import taxes and tolls. Not everything is expensive in Iceland, however, the most notable exception is energy, including electricity, water and geothermal power, which is relatively cheap. That is an advantage for Iceland during the current global energy crisis.

Iceland’s geography means that most goods are imported and products need to be transported on container ships or by air. The small market only has a handful of companies handling imports to Iceland. Two companies take care of most shipping and the air cargo transport industry also has limited competition. The climate doesn’t help, as harsh weather conditions in winter can negatively impact transportation. 

Oligopoly is a wide-ranging issue across sectors. Most Icelandic grocery stores are run by one of two companies, Hagar and Festi with a single location of American Costco as their main competitor. The same two companies own most gas stations and Costco runs one station, which also happens to be the cheapest alternative for car owners. And the list goes on.

Taxes in Iceland are high, including import taxes, and again, it’s due to Iceland’s small market and population. However, the state maintains a strong infrastructure, e.g. a wide-ranging welfare system and an extensive road network. When fewer people shoulder those costs, it means higher taxes per person. The state also levies heavy tolls on imports in order to maintain local production, for environmental, social, and safety reasons. Local production, e.g. food production, does not have the same economies of scale as producers in other countries and therefore cannot keep the prices down to the same level. In order to support local production, protective tariffs are used on imports. These reasons seemed validated e.g. during the Covid pandemic when global supply lines were disrupted.

Iceland’s small population leads to a small market making it less attractive to global companies. A good example is from the global financial crisis in 2008 when the exchange rate of the local currency ISK plummeted. McDonald’s no longer considered Iceland a feasible market to operate in, so they shut down all McDonald’s locations in the country. A side note: Some Icelanders were happy to see the American burger chain leave the country while others missed it immediately, some to the extent that the first thing they do when visiting other countries is to grab a McDonald’s burger. In a similar vein, some Icelanders have regularly complained about the lack of Starbucks, but the café chain has never seen a reason to open a branch in Iceland due to the small size of the market. 

When Costco opened a store in Iceland in 2017, there was great excitement in the air, as Icelanders were only used to local grocery stores like Bónus and Krónan, where the variety is limited compared with other countries and prices are also significantly higher. The hype was so great that a large part of the population joined a Facebook group for sharing photos and prices of products bought in Costco. When this is written, roughly 25% of Iceland’s population are members of the group (97,482 members while the population of Iceland was 387,800 at the end of 2022).

Tourism has raised prices in certain categories, most notably the housing market where the explosion of Airbnb rental availability has limited the supply of housing available for locals to rent and pushed up prices. During the pandemic when tourism dried up in Iceland temporarily, the prices of rental housing unexpectedly went down after several years of steep increases, ever since the tourism boom around 2010. The government has taken initiatives to mitigate the Airbnb effect by setting a maximum of 90 days for short-term rental per year on the same tax level as other housing rentals. If people want to rent their apartments for more than 90 days each year, they’re taxed as if they were a business in the hospitality industry.

Through the years, Iceland has had numerous vicious circles of relatively steep salary increases followed by price increases, inflation and increased interest rates. At the time of writing, we are going up with the rollercoaster, as ongoing labour talks have proven tricky to resolve. Some workers are striking in an effort to get higher wages and the Central Bank just increased the interest rates for the 11th time in less than two years to combat inflation, which will in turn increase interest rates on people’s mortgages and increase the pressure on higher salaries. 

The other side of the coin is that Iceland offers higher salaries and a relatively high purchasing power despite the high cost of living. In times of crises and rapid inflation, locals tend to do what they can to minimise such effects by reverting back to traditions from a time when tough times necessitated a more frugal way of life. For example, when the financial crisis hit in 2008, people started to buy and even make their own slátur (an Icelandic speciality from the innards of sheep, similar to the Scottish haggis). The innards of sheep also increased in popularity as the main ingredients for dinner, e.g. hearts, liver and kidneys. In times of crises, people also tend to buy more wool and the popularity of knitting goes up. Not only are woollen hats, mittens, and sweaters great for keeping out the winter cold, but the knitting itself is a pleasant, relaxing activity. Recipes for a classic fish stew (plokkfiskur) start to appear more frequently, and baking and bringing lunch packs to work or school become commonplace.

For tourists in Iceland, there are various ways to save while enjoying a great trip. For breakfast, you could get ingredients from the low-cost grocery stores such as Bónus (the cheapest supermarket in Iceland) and Krónan instead of more expensive convenience stores , e.g. oats, raisins, skyr, bread, butter, cheese, vegetables, coffee and juice. If you are taking a road trip, you can save time (and have more time to explore the country) by packing lunch to have on the way instead of eating in restaurants. When you want to eat out, these are among the more economical options in Reykjavík:

  • Mandi offers Syrian food like shawarma and falafel and is probably the most popular lunch place in Reykjavík (it has a branch downtown and in Skeifan)
  • The Noodle Station in Reykjavík is also widely popular and offers noodle soup available in three variations: chicken, beef and vegetable, along with a mix of secret ingredients
  • Café Loki downtown Reykjavík offers a nutritious and filling Icelandic lamb meat soup and fish stew with rye bread 
  • Ramen Momo produces organic fresh noodles. Most of the ingredients in their dishes are locally made
  • 101 Reykjavík Street Food specializes in local food as well as international favourites, e.g. fish & chips, Icelandic fish stew and lamb soup (kjötsúpa)

In short

To sum up the points above, these are the main reasons for high prices in Iceland:

  • Geographic isolation
  • Oligopoly with very few companies dominating various sectors
  • High taxes and import tolls
  • Small population, hence a small market
  • Many global companies don’t see the market as feasible (e.g. McDonalds, Burger King and Starbucks)
  • Tourism has increased demand in some sectors and thereby the prices, most notably in housing, with Airbnb rentals 

Despite high consumer prices, salaries are also high, which makes for a relatively high purchasing power in international comparison. Then there are various ways for people to save, including buying food in supermarkets rather than restaurants.

See also our ASK IR on the cost of living in Iceland.

New Year, New Fees: Important Changes in 2023

hallgrímskirkja reykjavík

With the new year, several new regulations, taxes, and fees are coming into effect. Here, we break down the most significant changes for the nation and capital region in 2023.

New Fees on Fuel, Alcohol

In line with the 2023 budget, the alcohol tariff is set to rise some 7.7.%. The price hike will also disproportionately affect alcohol sold in Duty Free, which was taxed at 10% last year, but will now be taxed at 25%.

Fuel is likewise increasing in price. In order to fund infrastructure, the general cost of car ownership is rising significantly. A litre of petrol is set to increase by ISK 16 (0.11 USD, 0.11 EUR), and import duties on electric vehicles are also increasing.

Schools and Pools

In line with the expected 4.9% cost of living increase throughout Reykjavík, the price for admission to the city’s pools will also be increasing, from ISK 1,150 (8.10 USD, 7.58 EUR) to ISK 1,1210 (8.52 USD, 7.98 EUR). Children’s prices are increasing by similar amounts, although residents can still save significantly with pool passes.

The cost of preschool registration will also be rising on average from ISK 33,570 (236 USD, 221 EUR) to ISK 35,215 (248 USD, 232 EUR).

Changes in Recycling

Changes are also coming to waste management and recycling in the capital area.

Icelanders will now need to sort their trash into four bins, and recyclables will no longer be tolerated in the black bin (for trash). Bins will now be sorted into paper, plastic, organic waste, and mixed waste.

Alongside these changes come increases in cost, with garbage removal fees in Reykjavík increasing by 20%.

Read more about coming changes in the 2023 budget here.

 

PM Katrín Jakobsdóttir Condemns “Unacceptable” Practices by Landlords

In recent statement, PM Katrín Jakobsdóttir has condemned what she called “unacceptable” practices on behalf of Icelandic landlords and real estate companies.

Following her comments, work is expected to begin soon on reforming tenancy rights. MPs from the Left Greens, the Social Democratic Alliance, and the People’s Party have suggested that measures needed to be taken, potentially including a rent ceiling.

See also: Government Announces Increased Benefits

While Katrín did not specifically name any one real estate company, her comments follow recent news of one real estate company, Alma, raising rents by nearly a third in renewals for next year, potentially putting lower-income and fixed-income residents out on the street.

Katrín is quoted as saying: “I fully understand these demands in light of the recent conduct of some rental companies, which we have seen examples of in the media. Their conduct is completely unacceptable, as has been clearly stated. I have encouraged the rental companies to take responsibility and show moderation when they determine their rental prices in order to help us deal with inflation.”

Katrín and other ministers are expected to meet with members of the labour market in the coming days to discuss measures that can be taken.

Government Announces Increased Child and Housing Benefits

katrin jakobsdottir prime minister iceland

In the wake of the recently-concluded contract negotiations between VR and SA, the government has announced a series of measures aimed at supporting low- and middle-income households.

At a press conference at 14:30 today, Prime Minister Katrín Jakobsdóttir, alongside Minister of Finance Bjarni Benediktsson and Minister of Infrastructure Sigurður Ingi Jóhannsson, announced the new policies, which aim to support the buying-power of households, while keeping inflation rates down.

Improved Child Benefits

The child benefit system is to be simplified, while also increasing support for the system, allowing more to qualify for child benefits.

The improved child benefits will represent a total increase of ISK 5 billion from the current system over the next two years. Additionally, the system is to be streamlined to reduce the waiting time for child benefits, which are not to exceed four months after the birth of a child.

Changes in Housing

The government also plans to increase the housing supply by incentivizing the development of new real estate throughout the nation.

Increased access to social housing will also be a priority, with some ISK 4 billion to be allotted in 2023 to the expansion of affordable housing in Iceland.

Housing benefits for tenants will also be increased.

Additional reforms include improved pensions for the elderly and disabled, increased funding for workplace training, and reforms to pension funds.

Bundled along these concessions to Iceland’s cost-of-living crisis will also be a large increase to police funding.

Read the full announcement here.