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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ASÍ Concerned Over Rising Debt Service Burden of Households

apartments downtown Reykjavík housing

An economist with the Icelandic Confederation of Labour (ASÍ) has expressed worry over the housing market’s “weak support system” and has called on the government to take special measures to respond to interest rate increases. This year, almost 4,500 households will be withdrawn from the shelter of fixed interest rates, RÚV reports.

Concern for the near future

Since 2020, Iceland’s Central Bank has collected detailed data on real estate loans from the three large commercial banks, the ÍL Fund (the Housing Financing Fund), and the country’s nine largest pension funds. According to this data, almost 75% of households pay less than ISK 200,000 [$1,432 / €1,334] per month in interest and instalments while 14% pay more than ISK 250,000 [$1,789 / €1,667]. As noted in the Central Bank’s Financial Stability Report, defaults by households and companies have been very low. Nevertheless, Róbert Farestveit, Director of ASÍ’s Economics and Analysis Department, fears what lies ahead.

“We are concerned about those groups where over 40% of disposable income goes to housing costs,” Róbert told RÚV. “That group is quite large in Iceland.” Róbert took the example of an ISK 43 million [$308,000 / €287,000] non-indexed loan with a variable interest rate that was signed two years ago. When the interest rate was 3.4%, the payment burden was ca. ISK 163,000 [$1,166 / €1,087]. The interest rate now is 8.5% and the monthly payment has reached ISK 313,000 [$2,240 / €2,088]. “Those who have recently taken out a loan and those who increased their indebtedness at variable interest rates will feel this the most,” says Róbert.

Specific resources required

Since the Central Bank started a series of rate hikes in May 2021, many borrowers decided to fix the interest rates on their loans. This year, almost 4,500 households will be pulled out from that shelter of fixed interest rates. “This group expects to see a higher debt burden as things currently stand. Many borrowers are, therefore, expected to switch to indexed loans – and that trend has already begun,” Róbert remarked.

Róbert told RÚV that the Confederation of Icelandic Labour (ASÍ) was concerned about those households burdened with increased debt service. “We have been concerned that the support systems of the housing market are weak. Housing support is not great enough. This problem needs to be met with specific measures and not general ones.”

Housing market expected to cool even further

In an interview with Mbl.is yesterday, Þorvaldur Gissurarson, CEO and owner of ÞG Verk, argued that it was likely that the Central Bank’s latest interest rate hike would serve to “further cool the housing market” while at the same time reducing new construction projects and sales. This might spell renewed tension in the market when interest rates begin to fall again.

Mbl.is also spoke to Vignir Steinþór Halldórsson, owner of the construction company Öxa, who stated that the interest rate increases had had a significant impact on the housing market.

“We see what’s happening in the rental market. It’s exploding. Ever since first-time buyers stopped qualifying for loans (i.e. failing bank payment evaluations) – given that the requirements have become so rigid – many have had no choice but to rent or move back in with their parents. So, when interest rates go down, this will blow up in our faces and demand will once again exceed supply.”

Deep North Episode 6: Indexed Mortgages

indexed loan iceland

In the tug-of-war game between interest rates and inflation following the economic disruptions of COVID-19, Icelandic homeowners have been put under increasing pressure. We talk about a rather unique feature of the Icelandic financial system and its effects on Icelandic families.

Read more about indexed loans in our recent In Focus piece.

In Focus: Indexed Mortgages

indexed mortgage iceland

Iceland’s housing market has undergone rapid changes over the past two years, with prices shooting upward. The market has begun to gradually cool, as a result of rising interest rates, with prices stalling or even slightly lowering in some cases. While there are multiple factors that affect housing prices – including availability and a pandemic-inspired […]

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Housing Prices Drop, Indicating Potential Cooling of Market

iceland housing market

A recent report by the Housing and Civil Engineering Agency may indicate a cooling in Iceland’s housing market.

According to the report, the housing price index has fallen by some 0.4 per cent since last month. Although the change is a relatively humble one, the housing index has not decreased on a month-by-month basis since 2019.

Read more: Housing Prices Highest in Decades

Forecasts predicted a cooling in the housing market, given the recent hike in interest rates. Currently sitting around 7 per cent, the interest rate hike was in response to recent inflation, with the goal of de-incentivizing borrowing to cool off markets. The measures seem to be having an effect, although the high interest rates have made the Icelandic housing market especially difficult to enter for first-time home buyers.

Read more: Mortgage Payments to Continue Rising in Iceland

Una Jónsdóttir, director of Landsbanki’s financial department, stated in an interview with RÚV that “this means that we can fully expect inflation to subside faster than we had originally assumed. Inflation has become very high and housing is one of its main drivers. So a sign of cooling in the real estate market will mean that inflation will go down faster.”

Additional tightening of lending rules has also contributed to the contraction. “It is quite likely that key interest rates will continue to rise,” continued Una, “because we are nevertheless seeing very high inflation. Although there are some clear signs that the real estate market is starting to cool down, the underlying inflationary pressure remains very high. We have to try to get inflation down properly, and in order for that to be possible, interest rates definitely have to be raised somewhat further. We are at well over nine per cent inflation right now for the next few months, and the Central Bank’s inflation target is two-and-a-half per cent.”

Read more: Key Interest Rate Raised to 5.5% in Iceland

housing market in iceland
Data from Registers Iceland

Shown above is the average purchase price for an apartment in the capital region. This year alone has seen explosive growth, with prices rising in excess of ten per cent compared to last year.

Nevertheless, Una cautions patience for those who bought at the peak, stating that home-buyers have little to fear: “It’s only one month and it’s not a huge drop. Housing prices have risen a lot and are still quite high. So I don’t think this should have any major impact on those parties,” she said.

Rising Mortgages May Put Some Families in Tight Spot

Those who recently signed non-indexed mortgages with variable interest rates may find themselves in a difficult position, according to the Director of the Institute of Economic Studies at the University of Iceland. Monthly payments could increase by tens of thousands of króna as interest rates rise.

The Central Bank responds to COVID

As reported by RÚV, the Central Bank slashed interest rates to historic lows last year to mitigate the fallout from the COVID-19 pandemic. The cuts resulted in a real-estate boom, with many seeking to take advantage of low rates to secure roomier homes or to refinance. The majority of new mortgages signed during the pandemic have been non-indexed with variable interest rates. Although the payments are initially higher, such loans allow lenders to “own their homes sooner.”

But as the economy has recovered, the Central Bank has raised interest rates by 0.25% leading commercial banks to do the same. As economists expect inflation to continue to hover well above target rates – despite a strengthening króna – real-estate prices are expected to rise, along with wages, while unemployment is expected to decrease as the price of raw commodities remains high.

The best of times, the worst of times

Such trends put pressure on the Central Bank to continue to raise interest rates, which will in turn pressure commercial banks to do the same. This will directly impact the public, especially those who signed non-indexed mortgages with variable interest rates.

This could put them in a difficult position,” Sigurður Jóhannesson, Director of the Institute of Economic Studies at the University of Iceland, stated in an interview with RÚV. “Such caveats had been raised before, that is, that these types of mortgages looked good on paper because of the circumstances last winter, but that those circumstances wouldn’t persist forever. Nonetheless, those who were unprepared, who expected interest rates and inflation to remain low, may be put into a difficult spot.”

An increase of ISK 25,000 per month

As noted in a recent report from Landsbankinn, a 1% increase in variable interest rates for a non-indexed mortgage of ISK 30 million could result in an ISK 25,000 rise in monthly payments.

Icelanders’ Home Equity Has Doubled in Five Years

apartments downtown Reykjavík housing

Icelanders are taking out more mortgage loans and their collective home equity has doubled in the last five years, Kjarninn reports. This according to data recently published by Statistics Iceland.

After debt was deducted, Icelanders’ combined home equity was ISK 4.034 billion [$29.031 million; €24.959 million] at the end of last year, which is double what it was in 2015. All total, 78% of Icelandic households’ equity is tied up in real estate.

The value of real estate owned by Icelanders has also increased dramatically in recent years. At the end of 2010, according to real estate assessment (fasteignamat), the total value of Icelander-owned real estate was ISK 2.353 billion [$16.933 million; €14.558 million], whereas at the end of 2019, this total had increased to ISK 5.648 billion [$40.645 million; €34.944 million]. This is a total value increase of 140%. These valuations are, however, only based on assessment value, not market value.

Housing loans are also dramatically increasing. Icelanders’ combined mortgage debt was ISK 1.614 billion [$11.615 million; € 9,985 million] at the end of 2019, which is an increase of 141 billion [$1.014 billion; €872.377 million] from the previous year. Housing loans have increased by ISK 352 billion [$2.533 million; €2.178 million] since 2016, or 28%. By contrast, between 2011 and 2016, loans taken out by the nation’s homeowners had only increased ISK 56 billion [$403.004 million; € 346.476 million], or 4.6%.

The trend of increased debt and higher real estate prices has continued in spite of this year’s economic shocks. According to the Central Bank of Iceland’s recent Financial Stability Report (in English), total household debt in Iceland amounted to nearly 79% of the GDP at the end of June, a percentage increase of just over 2% in the last year. From 2016 and up until this year, the nation’s indebtedness has been in line with economic growth.

According to the report, “Growth in household debt is driven by an increase in mortgage loans, while other debt has contracted in real terms, as it has in the past few years. Notwithstanding the uncertainty afoot, household demand for mortgage loans is still robust, owing to falling financing costs and stable real wages despite the economic contraction. In July, net new lending to households totalled nearly 32 b.kr., about 80% above the twelve-month average.”

Icelandic households’ asset position has, nonetheless, improved. Home equity, which accounts for assets in excess of debt, increased considerably last year and is now twice as much as the GDP. Ten years ago, home equity was equal to the GDP.