Iceland's Housing Market Slows Down as Demand Wanes Amid Rising Interest Rates

After a decade of remarkable growth, Iceland's housing market is now experiencing a significant slowdown. The combination of rising interest rates and stricter lending conditions has adversely affected the demand for residential properties. According to Statistics Iceland, the nationwide residential property price index rose by a modest 2.26% during the year to Q3 2023, a sharp decline compared to previous quarters.

Furthermore, when adjusted for inflation, prices actually declined by 5.26% year-on-year in Q3 2023. Let's delve deeper into the factors impacting the housing market in Iceland.

Declining Demand and Increased Supply

The housing market in Iceland is witnessing a plummet in demand. Purchase agreements during the first seven months of 2023 dropped by 22.2% to 2,940 units compared to the same period last year. As a result, the number of unsold properties in the market has increased significantly. In Greater Reykjavik alone, the total number of used flats listed for sale in August 2023 almost doubled to 1,605 units compared to 842 units listed a year ago. Similarly, the number of newly constructed houses listed for sale in the capital surged to 1,048 units, nearly seven times the figure from the same period last year.

Shortage of Affordable Housing

Iceland is facing a shortage of affordable housing across all regions. A report released by the Ministry of Social Affairs and the Housing Financing Fund highlights that dwelling completions in the country have been averaging less than 1,900 units in the past decade. This falls significantly short of the required construction of 3,900 to 6,600 new units necessary to stabilize the market. To address this issue, a working group established by Prime Minister Katrin Jakobsdóttir has proposed the construction of approximately 35,000 apartments over the next ten years. The group recommends building at least 4,000 units annually for the next five years and 3,000 units annually thereafter. Additionally, the government plans to increase housing subsidies and improve land availability in the market.

Rising Interest Rates and Mortgage Market Growth

To curb soaring inflation, the Central Bank of Iceland has raised the key interest rate to 9.25%, resulting in rapidly increasing mortgage interest rates. In September 2023, the average interest rate on mortgages reached 10%, a significant increase compared to the previous month and a year earlier. Consequently, the country's mortgage market growth has slowed down. In August 2023, the total amount of residential mortgage loans outstanding rose by 5.2% to ISK 1.78 trillion (US$12.93 billion) from a year earlier, a notable deceleration from previous years.

Currency Trends and Tourism

The Icelandic krona has strengthened against the US dollar but weakened further against the euro. In September 2023, the krona appreciated by 4.6% against the US dollar compared to a year earlier, while it depreciated modestly by about 3% against the euro. Despite these currency fluctuations, tourism in Iceland continues to show signs of recovery. In the first seven months of 2023, visitor arrivals through Keflavik Airport increased by a substantial 41.9% compared to the same period last year.

Iceland's housing market is currently experiencing a noticeable slowdown due to rising interest rates and tighter lending conditions, resulting in declining demand and increased housing supply. The shortage of affordable housing further exacerbates the situation. To stabilize the market, the government plans to construct a significant number of new units and increase housing subsidies. The mortgage market is also feeling the impact of rising interest rates, leading to a slower growth rate. While the economy is expected to continue growing, the labor market remains tight, with a low unemployment rate. Overall, the housing market in Iceland is undergoing a period of adjustment as it navigates through these challenges.