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.

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.

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.

More than 4,000 Apartments Needed to Meet Housing Demand

apartments downtown Reykjavík housing

According to the latest report of the Confederation of Icelandic Industries, it is expected that in the next three years, there will be 4,360 fewer completed apartments entering the market than the estimated demand requires.

According to the forecast, a total of 2,800 completed apartments will enter the market this year. By comparison, approximately 3,800 completed apartments entered the market in 2020, followed by a decrease to around 3,200 in 2021, and then approximately 2,800 last year.

Read More: Difficult for First-Time Buyers to Enter Market

The recent report also predicts further contraction in 2025 and 2026. Looking further ahead, 2,800 apartments are expected in 2024, but in 2025 and 2026, the number will be no more than 2,000 per year given current trends.

However, given the current rate of population growth, it is estimated that there will be a need for 4,000 completed apartments this year and in the following two years. The accumulated deficit in supply and demand for new properties for the years 2023-2025 is projected to be 4,360 apartments.

Since the national agreement between the government and municipalities regarding the construction of 35,000 apartments over the next ten years was signed in July last year, the cost of average apartments has increased by approximately 7 million ISK [$50,000 USD, €46,000]. Interest rates have also driven housing prices up recently, and additionally, the cost of materials and labor for construction has increased by 2.6 million ISK [$18,000 USD, €17,000] during this period. An expected reduction in the tax incentives for construction will also increase the cost of apartment construction by an average of 1.2-1.5 million ISK in the coming years.

Read More: 35,000 Apartments to be Built in 10-Year Housing Plan

Given current trends, the report concludes that it is unlikely that the government’s target of constructing 35,000 new completed apartments within the period of 2023-2032 will be achieved unless the authorities take decisive action and intervene in the matter.

The recent report does, however, offer several recommendations. First and foremost, they suggest that the government should reconsider the proposed reduction of the tax refund for real estate developments.

The association also suggests that municipalities significantly increase the supply of plots and review the collection of fees before starting developments. “Last but not least, coordinated efforts by the government, municipal associations, the Central Bank, and labour market participants are needed to reduce inflation and inflation expectations, as this will create a foundation for lower interest rates,” the analysis states.

Real Estate Value Rises 11.7% in Iceland

architecture vesturbær old houses

The total valuation of all real estate in Iceland has risen by 11.7% year-on-year, according to next year’s real estate valuation, just released by the Housing and Construction Authority (HMS). Inflation over the past year measured 10.2%, meaning that the real value of property has only risen slightly.

“We are looking at big population growth, such rapid population growth that it has been suggested that Icelanders haven’t multiplied so rapidly since the 18th century. At the same time, housing construction is not keeping pace with this population growth and interest rates have risen a lot,” stated Tryggvi Már Ingvarsson, manager of HMS’ real estate department, at a presentation on the 2024 valuation report yesterday.

Highest rise in East and Westfjords

Just how much real estate has risen in value varies from region to region, with the highest rises in East Iceland and the Westfjords, at 22.4% and 20.5% respectively. The lowest rise was in South Iceland, at 12.9%, while it was only slightly higher in the capital area at 13%.

The real estate valuation in Seyðisfjörður, East Iceland, rose dramatically, or over 40%, likely due to many construction projects in the town. In Reykhólasveit and Vesturbyggð (the southern Westfjords) property value also spiked between 30 and 40%. As average property prices in those areas are much lower than, for example, in the capital area, such hikes do not amount to so much in ISK.

The capital area contains 60% of the entire country’s residential property and about 75% of the value of all residential property in Iceland.

Property value key for municipal coffers

The yearly real estate valuation in Iceland is important for municipalities, as around 15% of municipal funds come from property taxes, the largest part from commercial property taxes. Low valuation can have a negative impact on municipal coffers, especially if it is below inflation, which is the case in many regions.

Mayor of Vesturbyggð Þórdís Sif Sigurðardóttir attributes the dramatic rise in property valuation there to growth in the aquaculture and tourism industries. While there is little property vacancy in the region, the municipality is working to kickstart housing construction projects.

Property taxes are calculated based on property valuation, so while a rise in valuation means homeowners’ investment is paying off, it also means an increase in property taxes. Last year, property value rose 20% year-on-year, an all-time record.

Swedish Real Estate Company, Heimstaden, to Sell 1,700 Properties

iceland real estate

Swedish Real Estate Company, Heimstaden, is set to sell 1,700 properties as it prepares to exit the Icelandic market. RÚV reports. 

Heimstaden started operating in Iceland some three years ago and currently owns and manages around 1,700 rental apartments in the country. In total, the company owns and manages some 160,000 properties across 10 European nations.

However, in all other nations except for Iceland, pension funds and institutional investors have played large roles investing in Heimstaden.

Read more: Real Estate Market Slows

Gauti Reynisson, Heimstaden’s CEO in Iceland, stated to RÚV that they had been trying to get Icelandic pension funds and investors on board since the beginning.

However, despite some four months of negotiating, no progress has been made.

According to Gauti, even though demand for housing is high, the market conditions for long-term investment are too difficult in Iceland.

Such a large selloff of properties is likely to have a significant impact on the real estate market both in Reykjavík and the rest of the nation. Gauti stated to RÚV that Heimstaden is trying to manage the situation to minimize the impact on renters.

The company plans to start selling the apartments this summer, but Gauti says that they will respect all rental agreements, and people will have the opportunity to rent their apartments until the end of their notice period. Most of Heimstaden’s tenants in Iceland have a 12-month notice period in their contracts.

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.

Housing Prices in the Capital Area Continue to Fall

Reykjavík apartments construction

The house price index in the capital area fell by 0.5% month-on-month in January. In the last three months, the index has decreased by 1.4%, which is the biggest decrease over a three-month period since August 2010. This is noted by Landsbanki bank’s Hagsjá report.

Housing market showing significant signs of cooling

The Landsbanki bank published its Hagsjá report this morning. The report, referring to data published by the Housing Construction Authority yesterday, notes that apartment prices in the capital area fell by 0.5% between December and January. This is the third month in a row that the index has decreased between months. Such a long continuous decrease has not been seen since the end of 2009. Decreases between months at that time were, however, somewhat greater than what is seen now.

“Nevertheless, this measurement and the latest trends,” the report reads, “indicate that the market is starting to show significant signs of cooling. This will contribute to the lowering of inflation, just as the Central Bank’s actions – which now seem to be yielding some results – have aimed to do … it is obvious that the market in the capital area has started to cool down considerably.”

The report notes that the price of detached houses decreased by 0.74% month-on-month, while apartment prices have decreased by 0.4%. In the last three months, detached houses have decreased by 4%. The cooling of apartment-building prices has not been as rapid; in the last three months, the price of apartments has decreased by 0.7%.

“The annual increase in the house price index is now 14.9%, which has not been lower since May 2021,” the report points out.

Fewer purchase agreements signed

Hagsjá also notes that the number of purchase agreements signed for residential property has not been lower since January of 2011, or 280. In comparison, 529 purchase agreements were signed last December.

“It should be kept in mind that these are preliminary figures, which are subject to change as more purchase agreements are received by the Housing Construction Authority. The month of January is often quiet in the housing market, but this most recent January appears to stand out.”

The report concludes by saying that the housing market is starting to show rapid signs of cooling: “The Central Bank has implemented various measures to stem rising inflation, e.g. increasing its interest rates significantly and tightening borrower conditions, which now seem to be producing the desired results.”

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.”