New Law Limits Airbnb Rentals

Minister Lilja Alfreðsdóttir

Businesses are no longer allowed to rent out units classified as residential housing on short-term rental sites such as Airbnb. This is the result of a new law, spearheaded by Minster of Culture and Business Affairs Lilja Alfreðsdóttir, that was passed last week in Alþingi, Iceland’s Parliament, Mbl.is reports.

The law is a response to rising housing prices in Iceland and the Airbnb boom in downtown Reykjavík.

Exception for homeowners

Despite this change, owners of apartments can still rent out their units for up to 90 days a year for up to 2 million ISK [$14,300, €13,300]. “After they hit that mark, the owner can not apply for a lodging license, which has been common practice until now,” a press release from the ministry reads. “Lodging licenses will only be issued for commercial housing or units in the countryside, i.e. farm accommodation. We reiterated that homestays are always subject to registration and a license that must be renewed yearly.”

Aim to increase housing supply

The new law has the aim to boost the supply side of residential housing in and around the Capital Region, to meet increased demand for housing. “With this change, the difference between residential and commercial housing will be clearer when it comes to accommodation and we’re looking at the actual use of the units,” said Lilja. “It’s no longer possible to buy urban residential housing and rent it out for more than 90 days, like we’ve seen in downtown Reykjavík where even entire apartment buildings have been turned into hotels.”

Real Estate Sales Nearly Double, Rent Prices Rise

architecture downtown Reykjavík houses

Real estate sales in Iceland nearly doubled between January and February of this year, according to the latest report from the Housing and Construction Authority. The jump is most noticeable in municipalities near the capital area. In Reykjanesbær, not far from the evacuated town of Grindavík, the number of sales tripled between January and February.

Rental prices rise

In Akranes, just one hour north of Reykjavík, the number of real estate sales more than doubled, while in Árborg, South Iceland, they nearly doubled. Rental prices also rose faster than general price levels, according to the report. This was especially true on the Suðurnes peninsula, where Grindavík is located, where rental prices are 16% higher now than they were in September 2023. Rental prices rose 3-9% in the capital area during the same period.

675 Grindavík properties wait for government buyout

The town of Grindavík (pop. 3,600), located on the Suðurnes peninsula, was evacuated in November 2023 due to seismic activity. The town has since seen four volcanic eruptions just to the north, in the Sundhnúkagígar area. Three houses were destroyed in the January eruption and the Government has since offered to buy homes from Grindavík residents if they choose.

On April 12, the first such purchase was approved, and 675 others were waiting to be processed. For comparison, an average of 625 real estate purchase contracts were registered in the capital area and neighbouring municiaplities each month last year. This means that the property purchases of Grindavík residents who are relocating could equal the region’s total monthly demand.

Grindavík residents say the government buyouts are proceeding too slowly, impacting their ability to relocate in the heating-up housing market. They have called a protest for this afternoon in front of Alþingi, Iceland’s Parliament.

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.

Government Considers Buying Out Grindavík Homeowners

The Icelandic government is considering buying out Grindavík homeowners who want to relocate in light of the ongoing volcanic threat to the town. At a press conference this afternoon, government ministers announced long-term measures are in the works to relieve Grindavík residents of the financial burden of owning homes in which they cannot live. The measures are still being finalised but will be put forth in a legislative bill in early February.

Unknown if or when Grindavík residents can return home

Grindavík was evacuated on November 10, 2023 due to strong earthquakes and the threat of volcanic eruption. A short but powerful eruption occurred near the town in December, and a second one in January occurred just outside the town limits, destroying three houses at the town’s northern edge.

Magma continues to collect underground at Svartsengi, north of Grindavík, and volcanologists say that further eruptions can be expected in the area. Grindavík has sustained considerable damage to infrastructure and homes, and it is unclear when residents will be able to return home.

Government aims to resolve uncertainty

The government measures introduced today are intended to resolve the uncertainty Grindavík residents have been faced with since they were evacuated from their homes last year. The measures aim to enable Grindavík residents to establish secure homes and ensure secure livelihoods while the town remains unsafe to inhabit. The government has also extended its short-term support measures for the displaced Grindavík residents.

At the press conference, Prime Minister Katrín Jakobsdóttir made it clear that the government was still finalising exactly what form the assistance would take, but that it was considering both buying out Grindavík homeowners so they would have the funds to purchase housing elsewhere, as well as taking on the interest payments on their mortgages to relieve them of that financial burden.

The decision is a big one, Finance Minister Þórdís Kolbrún Reykfjörð Gylfadóttir underlined. She added that government measures would impact other economic goals such as curbing persistent inflation. She outlined that the government would also explore whether it was possible to delay such a big decision as buying out homeowners through other measures that would relieve financial pressure on Grindavík residents.

 

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.

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.

Regulation Changes Needed to Ensure Safe Housing

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

Iceland’s housing problem gets worse with each passing year, President of The Icelandic Confederation of Labour (ASÍ) Finnbjörn A. Hermannsson stated in a radio interview yesterday morning. One died and two others were hospitalised in a fire earlier this week that broke out in an industrial building that was being used for housing. Thousands are likely living in buildings that are not classified as residential in Iceland and Finnbjörn says such residences should be legalised to ease safety monitoring.

Housing a key issue in upcoming wage negotiations

Finnbjörn says there simply isn’t enough housing to meet demand in Iceland. “We can’t even keep up with normal [population] growth, let alone when we get such a huge wave of working people that the society needs,” he stated. “Everyone needs somewhere to live and so they go to these industrial buildings that are not intended for residence.”

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. Finnbjörn says that housing will be at the forefront in the coming collective agreement negotiations. He expressed his faith that the situation would improve.

New legislation on the way

Living in buildings that are not classified as residential buildings is currently illegal in Iceland. It has proven difficult for fire departments to monitor such buildings due to privacy laws. However, the Minister of Infrastructure plans to introduce a bill next month that would allow for temporary residence permits in buildings that are not classified as residential, provided they fulfil safety requirements. The legislation would also authorise fire departments to monitor such buildings more closely.

One Dead Following Reykjavík Fire

fatal accident Iceland

Three people were transported to hospital for emergency care after a fire broke out in an industrial building in Reykjavík yesterday afternoon. One later died in intensive care, according to a notice from Capital Area Police. The condition of the other two is not considered life-threatening. People were living in the building although it is not zoned for residential use.

Fire safety evaluated as adequate

A spokesperson for one of the building’s owners told RÚV yesterday that authorities had recently decided to reclassify the part of the building that people had been living in from residential housing to commercial housing, and that the owners wanted to have that decision overturned. The spokesperson also stated that the fire department had evaluated fire safety measures on the premises on October 13 as being adequate, with the exception of lacking one fire escape. The owners had been given a deadline to install an additional fire escape and had been addressing the issue.

The cause of the fire is unknown but an investigation is underway.

Many people living in non-residential buildings in capital area

This is the second case of a fire breaking out in an industrial building being used as housing in the capital area within two months. On August 20, a fire broke out in Hafnarfjörður in an industrial building where at least 17 people had been living. Luckily, no injuries or fatalities were reported. Six people who had been sleeping when the fire broke out were rescued from the flames.

“Residing in commercial [or industrial] buildings is still not permitted, though there is a lot of it in the capital area,” Birgir Finsson, Acting Fire Chief of Greater Reykjavík, told reporters at the time.

Fatal house fire prompts regulation changes

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. In July 2023, the Minister of Infrastructure drafted an amendment to fire safety regulations in an effort 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.

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.