Iceland real estate

Iceland, the land of fire and ice, is a small island in the North Atlantic Ocean with population of about 300.000. Most foreigners have only heard of this country for one following reasons, that it is a great place to visit because of nature or nightlife, that great musicians such as Bjork or Sigurrós come from Iceland, that the banking system collapsed or perhaps you were stranded on an airport because of the eruption from Eyjafjallajokull.

Fewer people are aware of the Icelandic real estate market that has been on a roller coaster ride for the last decade or so, with prices first exploding into a bubble but later collapsing. Much of this is due to the infamous Icelandic banks that entered the mortgage market in full force in 2003-4 providing incredible amount of liquidy while requiring only minimal or no down payment. The banks however got into trouble in 2007 and finally collapsed in 2008 effecting the entire country as well as some neighboring countries.

Current prices

Like everywhere else in the world price of housing varies greatly between areas and neighborhoods but to give some idea of housing prices, a three bedroom apartment 960 square feet (90 square meters) in the metropolitan area would go for about 20 million ISK = 175.000 USD. As you get further from the urban center housing usually gets much cheaper.

Past price development

As Iceland is a country that has experienced rampant inflation even before the banking crises so there is not much point in evaluating housing prices in the local currency Icelandic Krónur (ISK) without adjusting for inflation. In the first chart there are four indexes that have been normalized to start at 100. The indexes represent inflation, housing prices, salaries and building costs. In the second chart housing prices, salary and building costs are divided by inflation to give the “true” price change in each of those areas. It is easy to see from the charts that housing prices start flying in 2003 outpacing all other indexes but then starts to descent sharply in 2008. Despite the fact that housing prices in Iceland have lost about third of their value in real terms over the past two years the decline is not anywhere near as bad as it could have been as prices are still about 20% higher than before the start of the bubble.

Future concerns

Today housing prices in Iceland seem to be stabilizing as the price is keeping pace with inflation, the volume of sales has also increased significantly from the bottom. There is also more interest in the Icelandic real estate market than it was year back; however this interest seems to be greatly influenced by lack of other investment alternatives. Currently there is negative real interest rate on bank accounts and the stock market is more or less non existent after collapsing during the banking crisis. There are also currency restrictions in place that have been in force since the banking crisis which makes it much more difficult for locals to invest abroad. If other investing opportunities were to open up it might make the Icelandic real estate market less attractive and have an adverse reaction both in terms of housing prices and volume. Furthermore it is commonly held view that in order to not crash the market, banks have only listed limited numbers of houses and apartments after foreclosing. While this has positive short term effect on the market the long term impact could be negative as this could lead to a supply that could trickle slowly out over the next months or years

Mortgage

The typical mortgage for buying real estate in Iceland is long term lasting 25-40 years with fixed rates. The mortgage is however adjusted for inflation, so for example if price of gas goes up so does the mortgage. This can greatly affect the monthly repayment rate and quickly absorb any equity in the real estate if inflation exceeds rise in housing prices. Normally downpayment would be about 20% of the price but this can vary a bit, in particular higher downpayment is needed for more expensive housing. Both the equity from the downpayment as well as the real estate itself serve as collateral for the mortgage. However unlike in the US (at least some states) the mortgage is tied to a person so if default on the mortgage occurs it may not be enough to return the keys as the person is liable for the whole amount.

Conclusion

The Icelandic real estate market like many others markets has undergone boom and bust cycle. Currently prices seem to be stabilizing but there are multiple factors that could influence the market negatively. Some special issues such as the standard inflation adjusted mortgage needs to be carefully evaluated before entering this market. Future prices are hard to predict, today prices in real terms are similar to 2004 which is of course much lower than the peak that occurred during the boom years. However the real estate market might not yet entirely reflect the "correct" prices for a country that has experienced financial collapse. Nevertheless as the Icelandic currency remains weak, and local investment is directed to the housing market due to lack of other options, housing may nevertheless be prove to be a decent investment.

Data about housing prices was obtained from Registers Iceland, the data about salary, inflation and building costs are obtained from Statistics Iceland

p.s. this post was originally written in 2011. While the content is still relevant somewhat similar but more recent information about the Icelandic real estate market can be found here