Financial Hurdles and Land Shortages Stifle Housing Growth

Miðborg Reykjavíkur - tekið úr byggingakrana

The Housing and Construction Authority (HSM) reports that new apartment construction has decreased by 9.3% compared to last year, and only 56% of the estimated housing need will be met next year. The CEO of a local construction company has attributed the shortfall in housing to governmental inaction, high financing costs, and insufficient land availability.

Only 56% of housing needs met

As noted in a recent report by the Housing and Construction Authority (HSM), construction has commenced on 9.3% fewer apartments compared to the same period last year. The scope of new projects has also contracted by a third year-on-year while the number of apartments is at the same stage of progress as they were a year ago. Furthermore, HSM expects 3,020 fully completed apartments this year and 2,768 apartments next year, which would only meet 56% of the estimated housing need.

In an interview with the evening news on Stöð 2 yesterday, Gylfi Gíslason, the CEO of the construction company Jáverk, traced this state of affairs to governmental inaction in matters of housing; high financing costs and a lack of land availability were slowing down construction.

As noted by Gylfi – and substantiated by HSM’s recent report – it is necessary to build twice as much as is currently being done to meet housing needs, and, due to this, significant price increases are expected soon. Indeed, HMS has for several months highlighted that not enough is being built in the country relative to population growth, Vísir notes. Gylfi added that this situation was anticipated.

“Land is needed to build houses, and the cost of capital has been too expensive due to interest rates. Furthermore, a decision was made, over a year ago, and without prior warning, to increase taxation – vis-a-vis a reduction in the VAT refund on new buildings. All of this has had an impact. In the long term, we just need a greatly increased supply of land,” Gylfi remarked.

Asked about the government’s actions over the past months regarding the situation, Gylfi replied that little had happened: “An increased supply of land has not yet materialised. Interest rates are at their highest. Everyone in this market predicted it would be like this. Perhaps it is only now becoming a reality.”

When asked if government action was coming too late, Gylfi replied thusly: “Yes, yes. Or maybe we just want it this way. That’s quite possible. There was a desire to reduce economic overheating. It was criticised that this was happening on both the supply and demand sides. It was done, and I believe that these consequences are becoming visible if these forecasts prove correct,” Gylfi concluded.

Residential property prices risen by 5.2%

As noted in a recent article on the HMS website, over the past twelve months, residential property prices have risen by 5.2%, with the annual increase reaching 5.7% in February.

The new residential price index rose by 0.8% month-on-month in March, compared to a 1.9% increase in February. Since the start of the year, residential prices have been rising faster in rural areas than in the capital region.

In March, single-family homes in the capital region increased by 1.1% month-on-month and have now risen by 4.6% over the last twelve months. Multi-family homes in the capital region increased by 0.6% month-on-month and have risen by 4.9% over the past twelve months.

Iceland Sees Surge in Approved Short-Term Apartment Rentals

architecture vesturbær old houses

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.

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.

Real Estate Value Rises 11.7% in Iceland

architecture vesturbær old houses

The total valuation of all real estate in Iceland has risen by 11.7% year-on-year, according to next year’s real estate valuation, just released by the Housing and Construction Authority (HMS). Inflation over the past year measured 10.2%, meaning that the real value of property has only risen slightly.

“We are looking at big population growth, such rapid population growth that it has been suggested that Icelanders haven’t multiplied so rapidly since the 18th century. At the same time, housing construction is not keeping pace with this population growth and interest rates have risen a lot,” stated Tryggvi Már Ingvarsson, manager of HMS’ real estate department, at a presentation on the 2024 valuation report yesterday.

Highest rise in East and Westfjords

Just how much real estate has risen in value varies from region to region, with the highest rises in East Iceland and the Westfjords, at 22.4% and 20.5% respectively. The lowest rise was in South Iceland, at 12.9%, while it was only slightly higher in the capital area at 13%.

The real estate valuation in Seyðisfjörður, East Iceland, rose dramatically, or over 40%, likely due to many construction projects in the town. In Reykhólasveit and Vesturbyggð (the southern Westfjords) property value also spiked between 30 and 40%. As average property prices in those areas are much lower than, for example, in the capital area, such hikes do not amount to so much in ISK.

The capital area contains 60% of the entire country’s residential property and about 75% of the value of all residential property in Iceland.

Property value key for municipal coffers

The yearly real estate valuation in Iceland is important for municipalities, as around 15% of municipal funds come from property taxes, the largest part from commercial property taxes. Low valuation can have a negative impact on municipal coffers, especially if it is below inflation, which is the case in many regions.

Mayor of Vesturbyggð Þórdís Sif Sigurðardóttir attributes the dramatic rise in property valuation there to growth in the aquaculture and tourism industries. While there is little property vacancy in the region, the municipality is working to kickstart housing construction projects.

Property taxes are calculated based on property valuation, so while a rise in valuation means homeowners’ investment is paying off, it also means an increase in property taxes. Last year, property value rose 20% year-on-year, an all-time record.

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.

Iceland’s Housing Market “Booming, Not Bubbling”

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. “

More Young Icelanders Living With Their Parents During Pandemic

iceland real estate

The percentage of young Icelanders who live with their parents has gone from 42% to 70% in less than a year, according to a survey Zenter performed for the Housing and Construction Authority. It’s clear that COVID-19 plays a role, as 18-24 year-olds’ unemployment has risen 134% in one year.

The Housing and Construction Authority’s economic report states that conditions for buying real estate have never been better, due to lower interest rates. The real estate market has been a busy one since the beginning of summer as more people have been able to buy real estate. This affects the rental market and a recent survey indicates that renters are getting fewer. Iceland’s rental market is an unstable one and not many people choose to rent if they have the option not to.

The percentage of people who rent their home hasn’t been lower since late 2008, just after the banking collapse. Since then, the percentage has hovered between 14-18%, averaging at 16%. Since mid-year 2019, the percentage has steadily gone down, from 18% July 2019 to 13% July 2020. This correlates with the timing of the Central Bank of Iceland lowering interest rates. The Housing and Construction Authority’s last rental survey indicated that nine out of ten would rather own their home than rent if possible.

Since the pandemic started, the supply of rental apartments has increased, rental prices have gone down and more people have the option of buying a home. According to the survey, only 14% of people believed COVID-19 had negatively impacted their position in the rental market. There’s one group however, that’s been disproportionately impacted by the pandemic, 18-24-year-olds. At the end of last year, only 42% of them were living at home with their parents but that number has risen steadily since then, reaching 70% in August. The tourism and hospitality industries, where many in this age group work, are going through a deep recession. Unemployment for people in this age group has more than doubled while at the same time, the percentage of employment overall has decreased by 14.5%. That’s a strong indication that economically speaking, the pandemic is hitting young people harder than others. They’re stuck living with their parents and aren’t entering the rental market or buying their own homes at the moment.