Grindavík Exodus Heats Up Housing Market

grindavík evacuation

The housing market showed signs of heating up in February, according to a new report from the Housing and Construction Authority (HMS). The biggest change was in the vicinity of the capital area, which HMS attributes to the residents of Grindavík entering the market to buy new homes, RÚV reports.

Grindavík was evacuated in November due to seismic activity. The town has seen four volcanic eruptions just to the north, in the Sundhnúkagígar area, since December. Three houses were destroyed in the January eruption and the Government has since promised to buy homes from Grindavík residents if they choose.

Prices rise and activity increases

According to HMS, an uptick in the housing price index and data on real estate listings show increased activity in the market. More than 1,400 listings were removed in February, indicating completed sales, which is double compared to January. Reykjanesbær, a municipality near Grindavík, saw the number of completed real estate purchase agreements triple compared to January.

The housing price index rose by 1.9% between January and February and has risen by 5.7% in the last year. Outside of the capital area, the bump was 6.4% between January and February and 8.5% in the last year. HMS attributes this to activity from Grindavík residents in municipalities such as Reykjanesbær.

Reykjavík to Address Short-Term Rental Market Disruption

iceland refugees

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.

New Housing Report Shows Increase in New Apartments

architecture Kirkjusandur apartments

The latest report on housing shows that the number of new apartments has increased significantly this year, and there is still momentum in the construction industry this year.

According to data from the Housing Registry of the Housing and Construction Authority, the number of apartments under construction has remained relatively stable since the beginning of the year and is well above the historical peak, with over 7,000 units. The number of completed apartments has increased significantly in both the capital region and rural Iceland compared to the same time last year, according to the agency’s data.

Read More: 4,000 Apartments Needed to Meet Housing Demand

The number of apartments at the first stage of construction increased by 36% since last year, according to the latest Housing and Construction Authority census from March. Additionally, statistics from Statistics Iceland show that activity in the construction industry has continued to grow rapidly this year at a constant level. There are as of yet no clear signs that the number of apartments under construction has decreased, though these numbers could be affected by rising interest rates.

Despite the increase in the population, it appears that the number of residents per apartment has decreased from the years 2018-2020, hopefully indicating that construction has kept pace with population growth. The housing report states that there doesn’t seem to be a significant shortage of apartments compared to the previous decade. The report also indicates that authorities will continue to support the supply of apartments, including ongoing funding for the public housing system, as announced in June.

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Fire in Hafnarfjörður Industrial Building Used for Housing

Slökkvilið höfuðborgarsvæðisins bs / Facebook. Fire in Hafnarfjörður, August 20, 2023

Seventeen people were registered as residents of an industrial building in Hafnarfjörður in the Reykjavík capital area that was heavily damaged when a fire broke out yesterday. The building was not approved for housing. A couple and a family of four were sleeping inside the building when the fire broke out but were woken up by good samaritans who saw the rising smoke and ran over to help. No injuries or fatalities have been reported.

The fire broke out at Hvaleyrarbraut 22 around noon yesterday, and firefighters did not manage to quell the flames entirely until around 4:00 AM this morning. Duty Officer Þorsteinn Gunnarsson of the Greater Reykjavík Fire and Rescue Service said the building was heavily damaged and a part of it had been torn down in order to put out the fire.

Saved a family of four from the flames

Guðrún Gerður Guðbjörnsdóttir called emergency number 112 immediately when she spotted the fire. When she realised it was in the building where her daughter lived, she made her way in. “I ran up the stairs, jumped onto the roof and ran to the window where my daughter lives,” Guðrún told RÚV reporters. She managed to open the window and wake up her daughter and her daughter’s boyfriend. There was already a lot of smoke in the apartment when she reached them.

Another civilian working near the building told reporters that he had run over when the fire broke out and woken up a family of four that was fast asleep inside the building. The family managed to escape to safety. The building was also used as storage and firefighters did their best to save valuables that were stored on the lower floor of the building, though accessing the storage rooms proved difficult.

Likely more than 17 living in the building

Birgir Finsson, Acting Fire Chief of Greater Reykjavík, says 17 people were registered as living in the building, which was not approved as residential housing. He stated that it was likely, however, that even more had been living there. “Residing in commercial [or industrial] buildings is still not permitted, though there is a lot of it in the capital area,” Birgir stated.

Following a fatal house fire in June 2020, Icelandic authorities launched an investigation into housing conditions in Iceland that found that between 5,000 and 7,000 people were living in properties classified as commercial or industrial buildings in Iceland in 2021. The Minister of Infrastructure drafted an amendment to fire safety regulations last month in efforts to ensure more people have their actual residence registered correctly and make it easier for authorities to enter housing where fire prevention measures may be inadequate.

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.

Difficult for First-Time Buyers to Enter Housing Market

iceland real estate

According to a real-estate developer in the capital area, the process of selling apartments has lengthened considerably as compared to the autumn. Last fall, every unit in one of the developer’s buildings was purchased over a single weekend. Presently, however, a nearby building of similar design has only seen three units sold. None of the purchasers were first-time buyers.

No first-time buyers

As noted by RÚV, two similar buildings stand side by side on Kinnargata in Garðabær. Units within one of the buildings went on sale last fall; apartments in the other building went on sale at the beginning of the year. Developer Eggert Elfar Jónsson told the national broadcaster that when his company started selling apartments in the first building last September, all of the units were sold over a single weekend (the following Monday, they had received 30 offers for all 15 of the apartments – and all the units were subsequently sold.)

“And then we have another building that was ready six months later,” Eggert stated. “And we put the units on sale in late February, early March. There were maybe 20 to 25 groups that attended the open house. We received eight offers – but only three were accepted.”

Eggert described his surprise at learning that none of those who had bought an apartment in the two buildings were “first-time buyers,” especially considering the size of the apartments. He believes that fewer and fewer people are being approved by the bank’s payment evaluation system. “Interest rates have been rising continuously, and these two things [i.e. rising interest rates, which lead to stricter payment evaluations] are just pushing this group completely out of the market,” Eggert observed.

A simmering pot

As noted in the Central Bank’s recently-published Financial Stability report, the finances of households and companies in Iceland are deteriorating due to high inflation and higher interest rates. “The outlook is for inflation to be stubbornly high and debt service burdens to grow heavier,” the report reads. The Central Bank will announce its decision on whether or not to further raise the interest rate on Wednesday.

Eggert told RÚV that 3,500 new apartments must be brought onto the market every year to meet demand, although, as it stands, it looks as if far fewer will be constructed: “They’re putting a lid on this simmering pot. But if the market, generally speaking, calls for 3,500 apartments, and if first-time buyers are currently being kept away, it’s only right to expect the demand to double after some time or some months,” Eggert concluded.

Biggest Residential Construction Boom Outside of the Capital Since Crash

architecture Gardabær buildings crane urban planning

There are more apartments under construction outside the capital area than there have been since 2008. Vísir reports that there are currently 2,672 apartments being built outside of Reykjavík, the largest share of which—1,100 units—are located in South Iceland.

These figures come via the latest economic outlook report published by Landsbankinn’s economic department. The report also states that based on figures from Statistics Iceland, it appears that apartment prices both in- and outside of the capital are developing in a similar way, although apartment prices outside of the capital are actually rising faster.

Sales have gone up and prices have risen

There’s been a great deal of demand for housing over the last few years and the economic outlook report says that post-pandemic, low interest rates and changing consumption habits have boosted demand considerably. Sales have gone up and prices have risen.

Since last July, the residential market price index has gone up 22% for single-family homes in the capital area, while multi-family units have gone up by 24%. But the index outside the capital over the last twelve months has gone up even more: 29%.

Taking a broader snapshot of housing price increases across the board: compared to pre-pandemic, in February 2020, the residential market price index has gone up between 45 – 47%, regardless of whether it’s single- or multi-family homes in question, within the capital, or outside of it.

Most new builds in South Iceland, fewest in the East, Northwest, and Westfjords

Construction outside the capital is split pretty evenly between multi-unit and single-family residences. So far this year, there’s been a 12% increase in the number of apartments under construction, as compared to an over 33% increase between the end of 2020 and the early months of 2021. Before that, between 2009 and 2016, very few new apartments entered the real estate market, although there were many under construction.

The greatest proportion of new residential builds outside the capital area are, as mentioned, in South Iceland. The housing stock in the region has gone up by 4% in the last year, amounting to almost 500 new apartments. In the first seven months of this year, the stock increased by 1.7%, or just over 200 new apartments.

The housing stock on the Suðurnes peninsula alone has gone up by 2.5% since the start of the year; in 2021, it went up by almost 2% in the course of the year. This is on par with the increase of housing stock throughout all of North Iceland combined, where 260 new apartments were completed last year.

There are currently 500 apartments under construction on Suðurnes and in West Iceland, around 350 in Northeast Iceland, and fewer than 100 in East Iceland, Northwest Iceland, and the Westfjords.

Prices Expected to Keep Rising in Iceland

Finances in Iceland

Commodity prices on world markets are at an all-time high and Iceland has not escaped the effects of that development, RÚV reports. Price increases are not expected to slow in Iceland in the coming months, according to Andrés Magnússon, CEO of the Icelandic Federation of Trade and Services (Icelandic: SÞV). Andrés says the Central Bank of Iceland has no tools at its disposal to combat rising prices.

“We have not seen such increases during peacetime, those are the facts. All indexes, all commodity indices confirm it. No one would think that companies, whether large or small, in whatever form, could take this on [alone],” Andrés stated. “When there is such a large increase in the purchase price, it affects pricing, that’s nothing new.” He says the timing is particularly unfortunate in Iceland, as collective agreement negotiations are approaching.

“The government must be concerned about this. We must draw attention to the fact that the government has already come to the aid of farmers, because fertiliser prices are doubling, apparently, and has given farmers a grant of ISK 700 million [$5.4 million, €4.9 million]. It will be interesting to see whether the government intends to come to the aid of the entire public, which will inevitably be affected by this.”

Housing market impacts inflation

Andrés says the Central Bank of Iceland has no tools to tackle so-called “imported inflation,” when the price of imports increases. “This is a situation we have no control over here [in Iceland] and the Central Bank has no tools or equipment in its arsenal to respond. So in that sense it’s entirely new, dealing with what we call imported inflation.”

Social-Democratic Alliance MP Kristrún Frostadóttir stated that rising prices on the housing market played a big part in driving up inflation. “The largest part of the inflation that is above the inflation target is due to rising housing prices in these incredible times,” Krístrún stated, adding that the government could do more to address the issue. “A 17% increase in housing prices in one year is not normal and we are seeing this spread to other areas now. Now there is talk that domestic inflation is starting to pick up, why do you think that is? It’s because housing is the largest single item in individual accounting.”

Cost of Rent Has Increased Slowly Since Pandemic Hit

architecture downtown Reykjavík houses

Rental prices in Iceland have risen by just 1.9% since January 2020, economists of the Landsbanki bank report.

At the same time, real estate prices have skyrocketed. The increase can largely be explained by a growing demand for real estate and reduced interest rates.

According to the report, the rate of first-time buyers has never been higher which curbs the demand for rental flats. Fewer tourists also mean less opportunities for landlords to rent their flats short-term. All these factors contribute to higher real estate prices and a slower rise in rental prices.

For the past twelve months, rental prices in the capital area have risen by 3.4% while real estate prices have increased by 16%. In comparison, the consumer price index rose by 3% during that same period.

Rental prices vary between different areas in the city. Two-bedroom flats in the west side of Reykjavík (Vesturbær) currently have the highest price tag, or 3.441 ISK [23€, 26$] per square metre. Within the capital area, rental prices for two-bedroom flats are lowest in the municipalities of Garðabær and Hafnarfjörður, which are situated rather far away from the city centre. The situation is similar for three-bedroom flats, where the highest rental prices are found in the west side of Reykjavik, and the lowest in the municipality of Kópavogur.

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.