First-Time Buyers at Seven-Year Low

Reykjavík sunset cityscape

The number of first-time property buyers on Iceland’s housing market has dropped dramatically since the Central Bank of Iceland tightened loan requirements in June 2022, RÚV reports. First-time buyers have not been such a low proportion of real-estate purchasers in seven years.

In June last year, the Central Bank’s Financial Stability Committee lowered the maximum loan-to-value ratio on mortgage loans to first-time buyers from 90% to 85%. The debt-to-income ratio for first-time buyers was also set at 40%. These were just two of the changes made that tightened regulations on loans to this group. Central Bank Governor Ásgeir Jónsson stated the changes were intended to protect young people and cool the housing market.

“When the Central Bank of Iceland applied these measures, [the governor] talked about how it would be more difficult for first-time buyers to enter the market, and that has proven to be the case,” stated Kári S. Friðriksson, an economist at the Housing and Construction Authority (HMS).

Reversal of trend

The year 2021 was advantageous for first-time buyers: in the first quarter, they reached an all-time record of 1,941 in number. In the second quarter their average age dropped to 29, the lowest since 2006. In the third quarter of 2021, first-time buyers rose to a record 33.8%. Now tightened mortgage regulations and raised interest rates appear to have reversed those trends. In the last quarter, first-time buyers had dropped to 26.5% and numbered 900 – less than half the number in the first quarter of 2021.

Kári stated he would not be surprised if the current situation on the housing market would lead to a rise in rental prices. “They have actually risen quite little both considering housing prices and considering wages for several years now.”

Record Real Estate Movement in May and June

apartments downtown Reykjavík housing

Movement on Iceland’s real estate market broke records in May and June, increasing by around 50% compared to the same period last year. Banks also approved a record ISK 22.3 billion ($159 million/€140.5 million) in new housing loans in May. Experts say historically low interest rates have encouraged buyers, despite the downturn caused by the COVID-19 pandemic.

The data comes from the Húsnæðis og Mannvirkjastofnun (HMS)’s monthly report. HMS’s CEO Þorsteinn Arnalds told RÚV it’s difficult to pinpoint the cause of growth. Some economic uncertainty in the fall of 2018 may have led to a build-up of people wanting to buy but waiting for a better opportunity. “And then definitely factors such as lower interest rates have pushed many, because it’s definitely possible for many people to buy up without increasing their debt to income ratio greatly or that sort of thing.”

Housing prices have risen by 5.5% in Reykjavík between May of 2019 and 2020. There was also an increase in notarised purchase agreements in the rest of the country.

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