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.

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.”

First-Time Home Buys at a Ten-Year High

iceland real estate

First-time apartment purchases have gone up more in Iceland since 2009 than any other kinds of purchase, RÚV reports. The percentage of first-time home buyers during the first quarter of this year was 27.7%, up dramatically from 7.5% in 2009.

These were among the findings in the monthly report published by the Housing Finance Fund (HFF).

Statistical information on first-time apartment purchases is only available as far back as the second half of 2008. Based on the data from the available time period, however, the percentage of first-time home purchases has never been so high.

The highest percentage of first-time buyers were found to be in East Iceland, where 32% of all of the home purchases so far this year were made by individuals who had never owned a home before. Next was the Suðurnes peninsula in Southwest Iceland, at 31%. South Iceland and Northeast Iceland were tied for third place at 28%. Twenty-seven percent of all home purchases were made by first-time buyers in both the Westfjords and the capital area. West Iceland came in at 23% and North Iceland at 22%.

The report authors say that these figures show that it is now easier for people to save up to buy an apartment than it has been previously. It also appears, they say, that the increase in housing prices in the last ten years has only had a limited effect on first-time buyers.