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.

Governor Has Faith in the Banks’ Sense of “Social Responsibility”

Central Bank

A conversation has taken place between Iceland’s Central Bank and managers of the country’s commercial banks, the Governor of the Central Bank revealed at an open meeting before Parliament’s Economic Affairs and Trade Committee today. The Governor is hopeful that the banks’ sense of “social responsibility” will do its part to ease the rising debt burden of the public, RÚV reports.

Continued inflation a disappointment

As noted by RÚV, the Governor and Deputy Governor of the Central Bank answered questions at an open meeting of Parliament’s Economic Affairs and Trade Committee earlier today.

In the meeting, the Governor of the Central Bank, Ásgeir Jónsson, revealed that he had spoken with the managers of the commercial banks about responding to the increased debt burden of mortage payers. Ásgeir stated that he “could not tell the banks what to do” but that he had faith in their sense of “social responsibility,” adding that the banks needed to stand by their customers through thick and thin.

“Inflation has reached 9.9%, which is disappointing. It particularly disappoints me that the price of real estate continues to contribute to inflation,” Ásgeir also observed, observing that economic growth last year had exceeded 6%, which was “huge.”

Rising debt burden among property owners

At the meeting, Ásthildur Lóa Þórsdóttir, Member of Parliament for the People’s Party, expressed concerns about the ever-increasing debt burden of property owners due to high interest rates. Ásgeir responded that he accepted those concerns and informed Ásthildur that a conversation had taken place between the Central Bank and the managers of Iceland’s commercial banks in this regard.

“I can definitely inform you that there has been a conversation with the banks that they will be ready to respond,” Ásgeir remarked, adding that this conversation had taken place in light of the fact that “the situation could change quickly.”

Ásgeir mentioned that the banks had various devices and tools in order to accommodate the public due to the ever-increasing instalments of real estate loans – but that he also placed a certain amount of faith in the banks’ sense of social responsibility.

“I believe that they will stand by their customers through thick and thin; I think this has to be the case,” Ásgeir concluded, hopeful that the banks would accommodate their customers.

Banks Raise Interest on Non-Indexed Loans

currency iceland

All three of Iceland’s commercial banks announced that they would be raising interest rates on Friday. RÚV reports that Arion Bank, Íslandsbanki, and Landsbankinn are raising interest rates on non-indexed loans, as well as deposits. The hike comes on the heels of a 0.5% increase on key interest rates last week.

Interest rates on most types of non-indexed loans went up by 0.5% at Arion Bank, Íslandsbanki, and Landsbankinn. New non-indexed mortgages offered by Landsbankinn interest rates had a slightly lower hike; those went up 0.25-0.30%.

Read More: Inflation Rate Continues Climb, Now at 9.9% (January 2023)

Non-indexed interest rates on the banks’ home loans are now in the range of 8.0-8.5%, while interest rates on indexed loans remain unchanged.

Deposit rates were also raised, in most cases around 0.5%.

Looking Back: Mortgage Payments Continue Rising in Iceland (August 2022)

Friday’s interest increases come on the heels of the Central Bank’s decision to raise key interest rates by 0.5% last week, bringing it up to 6.5%. This was the Central Bank’s 11th increase on the key interest rate in a row. The lowest this rate has been is 0.75% in the spring of 2021.

Interest rates have not been higher since 2009.

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.”

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.

Mortgage Payments to Continue Rising in Iceland

Garðabær construction housing architecture

Steep interest rate hikes from Iceland’s Central Bank mean that many Icelandic families face much higher mortgage payments than they did one year ago. Doctor of Economics Ólafur Margeirsson, however, does not recommend those with non-indexed loans to refinance to indexed loans. Ólafur says ensuring more housing supply will be key in regulating the housing market.

The debt load of non-indexed loans in Iceland has risen by over ISK 100,000 [$709; €708] per month, in the case of an ISK 50 million loan with a variable interest rate of 3.4% taken in early 2021. “There are quite a few families who can’t afford an additional ISK 100,000 a month,” Ólafur told RÚV, saying there were two ways out of the housing market’s difficulties. “Firstly, we must encourage more supply of that which is lacking. And there is a lack of real estate in Iceland. There is a housing shortage so we must build more and continue building more. The other thing is limiting access to indexed loans in order for interest rate hikes to work.”

Central Bank will continue to raise rates to tackle inflation

Inflation has risen to 9.9% in Iceland, and the Central Bank Governor has stated that the bank will continue raising interest rates as much as necessary to tackle inflation. Ólafur did not recommend borrowers with non-indexed loans refinance over to indexed loans. “Remember that the principal on indexed loans increases. Try to pay off debts as quickly as you can, because then the impact will be less when the interest rate changes in the future.”

Ólafur added that housing would be a big issue in the coming wage negotiations this fall, suggesting that one solution is for “Icelandic pension funds, like pension funds in Europe, to invest in building new apartments in order to rent them out. With that, we are systematically increasing the supply of real estate, we are reducing pressure on rental prices, reducing the pressure on real estate prices, and with that, we are reducing inflationary pressure and interest rate pressure as well. This is a key point that must be discussed in wage negotiations.”

Eurostat: House Prices Risen Most Sharply in Iceland Since 2010

architecture downtown Reykjavík houses square

According to a new report by Eurostat, house prices have risen most sharply in Iceland over the past decade when compared to other European countries. Between 2010 and the first quarter of 2021, house prices in Iceland increased by ca. 140% and the cost of rent rose by almost 70%.

Estonia the only country that compares

Yesterday, Eurostat, the statistical office of the European Union, released a new report on the prices of homes and the cost of rent within the EU (and among members of EFTA). The report indicates that house prices have risen most sharply in Iceland compared to other European countries, or approximately 140% between 2010 and the first quarter of 2021. The cost of rent in Iceland has risen by almost 70% over the same period. Compare this to the building-cost index, which has increased by approximately 57% since 2010. The consume-price index has remained relatively stable.

The only other European country that has seen a similar increase in the prices of homes is Estonia, where cost has risen by approximately 130%. In Sweden and Norway, house prices have increased by 80% compared to ca. 50% in Denmark. The average rise in house prices over the past decade in Europe is approximately 35%. Only four countries have seen homes decrease in value over the past decade: Greece, Italy, Spain, and Cyprus.

The cost of rent has generally seen a more minor increase in Europe over the past decade, when compared to house prices, or approximately 15%. In a few countries, however, rent has risen faster than the cost of homes, e.g. in Finland, Ireland, and Lithuania. In Norway, Sweden, and Denmark, the increase in the cost of rent is much lower than in Iceland, or approximately 20%.

Interest rates raised and mortgage regulations tightened

Iceland Review reported on Wednesday that the Central Bank had raised key interest rates by 0.25%, bringing the rate to 1.5%. This change marked the Bank’s third interest rate hike since May, indicating a shift in direction as the economic forecast has improved.

Throughout last year, the bank’s Monetary Policy Committee (MPC) consistently lowered interest rates in response to the pandemic recession but now says it expects the domestic economic recovery to continue. The Central Bank’s key interest rate reached a historic low of 0.75% in November last year. In comparison, rates in January 2020 stood at 3% and in January 2019 at 4.5%.

The Central Bank also tightened mortgage regulations at the end of September, stating that rising real estate prices had “gone hand-in-hand with increased household debt.” The move, which entails instituting a maximum debt-to-service ratio of 35% for borrowers (40% for first-time buyers) is intended to support stability in the housing market.

May put some families in a “tight spot”

As reported this summer, this increase in key interest rates will likely have the most significant impact on those who signed non-indexed mortgages with variable interest rates. A report from Landsbankinn this summer demonstrated 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.

Read more about Iceland’s housing market below:

Central Bank of Iceland Tightens Mortgage Regulations

apartments downtown Reykjavík housing

In an effort to minimise long-term risk as well as household debt, the Central Bank of Iceland has adopted a maximum debt sevice-to-income ratio of 35% for borrowers and 40% for first-time buyers. The Central Bank lowered interest rates throughout last year in response to the pandemic recession, allowing many homeowners to refinance their debt or purchase more real estate. House prices rose as a result, and that “has gone hand-in-hand with increased household debt,” according to a statement from the Bank’s Financial Stability Committee.

Read More: Iceland’s Housing Market

The statement says that Iceland’s economic recovery over recent months has “supported household and businesses. On the other hand, asset prices – equity securities and real estate prices in particular – have risen markedly.” The position of Iceland’s three main banks is strong, with their capital and liquidity “well above regulatory minima,” making them resilient, the Central Bank says.

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.