Iceland’s house price rises decelerating sharply

After eight long years of soaring house prices, Iceland’s housing market is now losing steam. The nationwide residential property price index rose by a modest 4.17% in July 2019 from a year earlier – the lowest growth since January 2013, according to Statistics Iceland. In fact when adjusted for inflation, residential property prices increased by a miniscule 0.8% over the same period.

During the year to July 2019:

  • In Reykjavik, prices of single-flat houses rose by 2.37% (-0.67% inflation-adjusted) – the lowest y-o-y increase since August 2014. Prices of multi-flat houses increased 3.47% (0.39% inflation-adjusted).
  • Outside the capital, residential property prices increased 4.88% (1.76% inflation-adjusted), a sharp slowdown from the prior year’s 14.18% growth.

Iceland house prices

Currently, the average residential property price in Reykjavik ranges from US$375,000 to US$475,000, based on a 2019 report published by REAL Trends. A fancy new flat in the city centre can cost as much as US$7,000 per square metre (sq. m.).

Iceland experienced strong house price rises in recent years, mainly driven by booming tourism and robust economic growth. From 2010 to 2018, residential property prices surged 100% (58% inflation-adjusted), including a growth of 15% per year in 2016 and 2017.

Iceland’s economy grew by a robust 4.6% in 2018, following expansions of 4.6% in 2017, 6.6% in 2016 and 4.7% in 2015. However with exports and tourism both slowing, Statistics Iceland now predicts an economic contraction of 0.2% this year, far worse than its earlier forecast of 1.7% growth.

“The worsening outlook is attributed in part to a decline in the island’s outsize tourism industry, which has been exacerbated by the collapse of Icelandic low-cost carrier WOW air,” said Statistics Iceland.

In the first seven months of 2019, stay-over tourist arrivals fell by 2.4% to 1.13 million people from the same period last year, according to Icelandic Tourism Board, in sharp contrast to the average growth of 24% annually from 2013 to 2018. Most tourists come from the United States, the United Kingdom, Germany, Canada, France, and China.

Iceland house prices regions

With falling demand, residential construction shows signs of slowdown, with dwelling starts falling by 11% to 2,525 units in 2018 from a year earlier, according to Statistics Iceland. Though completions remain strong – rising by 30.3% y-o-y to 2,303 units in 2018.

House price increases are expected to slow further during the remainder of the year, amidst worsening economic conditions, based on a 2019 report by Arion Research.

“We forecast minor nominal housing price increases throughout the forecast period, but the rate of increase will slow down as time goes on,” said Arion Research. “Real prices will fall as soon as this year as inflation continues to climb.”

Iceland’s great house price boom

Iceland experienced an unprecedented housing boom from Q1 2000 to Q1 2008, with property prices surging 152.9% (71% inflation-adjusted), fuelled by rapid economic growth from 2000 to 2007, when the economy expanded by an average of 5.1% annually.

However, the collapse of Iceland’s banks in 2008 saw GDP shrink by 6.8% in 2009 and by another 3.4% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1% (-32% inflation-adjusted).

To save the economy and to help homeowners, Iceland’s state-controlled banks have forgiven mortgage loans for more than 25% of the population since end-2008, equivalent to about 13% of the country’s annual GDP.

Iceland gdp inflation

The economy bounced back in 2011, with GDP growth of 1.9%. In 2012, the country’s economic growth was 1.3%.

As the economy recovered, house prices rose - by 13.3% between Q2 2010 to Q4 2012. But this rise was partly illusory: when adjusted for inflation, house prices rose by just 2.6% over the same period.

The housing market has however grown robustly in the past six years, as the economy expanded by an average of 4.5% per year from 2013 to 2018:

  • In 2013, house prices rose by 8.7% y-o-y (4.3% inflation-adjusted)
  • In 2014, house prices rose by 6.1% y-o-y (5.2% inflation-adjusted)
  • In 2015, house prices increased 9.1% y-o-y (6.9% inflation-adjusted)
  • In 2016, house prices rose by 14.7% y-o-y (12.6% inflation-adjusted)
  • In 2017, house prices soared 15% y-o-y (12.9% inflation-adjusted)
  • In 2018, house prices rose by 6.9% y-o-y (3% inflation-adjusted)

During the boom years, property owners often received multiple offers as soon as their properties are listed for sale and sales prices were usually 4% to 8% above asking prices, particularly in the popular neighborhoods in downtown and western Reykjavik. Residential sales have risen by about 20% per year for four years, according to local real estate experts.

However the housing market is now slowing sharply, amidst ailing economy and struggling tourism sector.

A decade-long tourism boom is finally over

In the first seven months of 2019, stay-over tourist arrivals fell by 2.4% to 1.13 million people from the same period last year, according to Icelandic Tourism Board, in sharp contrast to the average growth of 24% annually from 2013 to 2018. The sudden decline in tourist arrivals was mainly due to the collapse of low-cost carrier WOW Air in March 2019, leaving passengers in the lurch. Compounding the adverse impact of WOW Air’s demise was the grounding of the Boeing 737 Max in March, after two new airplanes crashed in the preceding five months, killing hundreds of people aboard. Icelandair, the country’s flag carrier airline, now has nine Boeing 737 Max planes that it cannot fly. In fact, Icelandair was recently forced to fire 45 pilots who fly the Max.

Iceland tourists

As a result, scheduled flights are down 27.4% through the rest of 2019, according to data tool Diio by Cirium.

“We are prepared for the possibility of a deeper recession, and the numbers we are getting on tourist arrivals seem to indicate that that may happen,” said central bank governor Mar Gudmundsson.

Mortgage market growth slowing

The Central Bank of Iceland cut its benchmark seven-day deposit rate by 25 basis points to an all-time low of 3.75% in June 2019, following a 50-basis point cut in May 2019. As a result, the general interest rate on indexed loans fell to 3.19% in July 2019 from 3.65% a year ago.

Despite this, the mortgage market is noticeably slowing. In July 2019, the total amount of residential mortgage loans outstanding rose by a modest 2.3% to ISK 646.02 billion (US$5.19 billion) from a year earlier, according to the Central Bank of Iceland – far below the 8.5% growth in the previous year and the lowest y-o-y rise since August 2013.

Iceland residential mortgage loans

For new loans, July 2019:

  • Floating-rate residential mortgage loans: up 18.5% y-o-y to ISK 9.98 billion (US$80.22 million)
  • Fixed-rate residential mortgage loans: down by almost 71% y-o-y to ISK 1.67 billion (US$13.39 million).

Residential construction activity mixed

Dwelling starts have begun to fall.


  • Dwelling starts fell by 11% to 2,525 units in 2018 from 2,836 units a year earlier, according to Statistics Iceland. From 2009 to 2016, the average dwelling starts plummeted to just 650 units per year – sharply down from an annual average of 3,500 units in 2003 to 2008.
  • Dwellings under construction rose by 5.1% y-o-y to 4,545 units in 2018, the highest since 2010.
  • Dwelling completions soared 30.3% y-o-y to 2,303 units in 2018 – up from an annual average of 1,100 units from 2009 to 2017.

Iceland housing construction

In the capital, Reykjavik:

  • Dwelling starts fell 42% to 1,281 units in 2018 from 2,208 units a year ago but still higher than the annual average of 560 units from 2009 to 2016.
  • Dwellings under construction dropped 5.1% y-o-y to 2,845 units in 2018, already up from the annual average of 2,600 units from 2009 to 2017.
  • Dwelling completions rose by 7.3% y-o-y to 1,435 units in 2018, up from the annual average of 770 units in 2009-16 but still below the annual average of 1,800 units in 2003-08.

Based on projections released by Arion Research, nearly 2,600 residential buildings will be completed this year – the highest level since before the global financial crisis.

Supply mismatch

An increasing number of unoccupied high-end apartments is now flooding the capital, amidst slow sales. In fact, a recent report by Morgunblaðið showed that 331 apartments in ten new townhouses in downtown Reykjavík, which represents about 64% of the new supply, have not yet sold. The most expensive apartments are at Hafnartorg and Höfðatorg. Once completed, a unit could cost more than ISK 200 million (US$1.6 million). Some of these units first came on the market in late 2017. Another 240 units will be listed for sale in the coming year and the construction of more a thousand apartments is being planned.

Because of this, investors and builders are now hesitant to put their money into the housing market. One builder, who originally expected the sale of his apartments to take 12 months, now targets 18 months due to low demand. Another one is expecting the apartments to take 12 months longer to sell than originally thought.

“The contractors have been catering to the luxury market, which now seems to be more or less saturated,” said Asgeir Jonsson, an economist at the University of Iceland.

While hundreds of new luxury apartments remain empty, a lack of affordable housing remains a problem. Based on government estimates, about 8,000 homes are needed to address the affordable housing shortage in the country.

“They shouldn’t have stopped building in the suburbs, which are cheaper,” said one builder. “Apartments downtown are more expensive and less practical for families.”

In an effort to address the affordable housing shortage, the government announced last year that it would increase housing subsidies and the availability of land in the market. The new measure include:

  • Selling of a considerable area of government-owned land to Reykjavik City Council for construction;
  • Deregulation of housing and planning standards to speed up new residential construction;
  • Introduction of incentives to increase long-term rental housing;
  • Increase in rental benefit and special efforts to build low-cost housing for students and disabled individuals; and
  • Offering special support to families purchasing their first residential house.

Krona weakens against major currencies

The Icelandic krona keeps falling in value. By July 2019, it had lost about 14.6% of its value against the US dollar, with the monthly average exchange rate at ISK 124.662 = US$ 1. The krona also depreciated by about 11% against the euro, with the exchange rate at ISK 139.772 = EUR 1 in July 2019.

This partly offsets the 38% increase in the value of krona against the US dollar and 21% against the euro from March 2015 to March 2018.

Iceland exchange rate

During the global financial crisis, the value of the krona plunged from ISK62.33 = US$1 to about ISK123.73 = US$1, from December 2007 to December 2008. To stabilize the krona, US$ 2.1 billion was borrowed from the IMF and exchange controls were imposed that were still in place in 2015.

Economy slowing sharply, but public finances improving

In 2018, Iceland’s economy grew by a robust 4.6%, following expansions of 4.6% in 2017, 6.6% in 2016 and 4.7% in 2015. However Statistics Iceland now predicts an economic contraction of 0.2% this year. Private consumption is projected to increase by a modest 2.4% this year while exports and investment will fall by 2.5% and 5.7%, respectively. The Central Bank of Iceland is even more pessimistic, projecting a 0.4% economic decline.

From 2004 to 2007, Iceland’s average GDP growth was 7.2% annually, partly because the banking sector went on an ill-advised global lending binge.

However during the global crisis, three of Iceland’s largest banks-Glitnir, Landsbanki, and Kaupthing-collapsed, defaulting on US$85 billion of debts in 2008. GDP contracted by 6.8% in 2009 and by another 3.4% in 2010, according to the IMF. Iceland’s external debt ballooned to ISK14.88 trillion (US$119.6 billion) in 2008, up 99% from a year earlier. It further rose to ISK15.21 trillion (US$122.3 billion) in 2009.

Iceland gdp inflation

External debt started to fall again in 2010, as the economy recovered. By Q1 2019, the country’s external debt was just ISK2.33 trillion (US$18.7 billion), according to the Central Bank of Iceland.

In 2018, the Icelandic government recorded a budget surplus of 1.1% of GDP, its third consecutive year of surplus.

Nationwide inflation stood at 3.1% in July 2019.

Iceland unemployment

In July 2019, the seasonally-adjusted unemployment rate rose to 3.1%, up from 2.5% a year earlier and 1.8% two years ago, according to Statistics Iceland.

With a population of only 348,000 in 2018, Iceland is one of the wealthiest and most developed countries in the world. GDP per capita was US$74,278 in 2018, according to the IMF. This small country has also low taxes compared to other OECD countries. The economy is heavily dependent on fishing, which provides 40% of export revenues and employs 7% of the workforce. However in recent years, the country diversified into manufacturing and service industries - most notably, tourism.