The nationwide residential property price index rose by 6.9% during the year to October 2013, the highest year-on-year increase since June 2012, according to the Statistics Iceland. When adjusted for inflation, residential property prices increased by 3.1% during the year to October 2013.
During the year to October 2013:
- Prices of single-flat houses in Reykjavik rose by 5.6% (1.9% inflation-adjusted). Multi-flat houses saw prices increase by 7.7% (4% inflation-adjusted).
- Outside the capital, house prices increased by 4.3% (0.7% inflation-adjusted).
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 4.6% annually.
However, the collapse of Iceland’s banks in 2008 saw GDP shrink by 6.6% in 2009 and by another 4.1% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1%.
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.
The economy bounced back in 2011, with a real GDP growth rate of 2.9%. In 2012, the country’s economic growth was 1.6%. As the economy recovered, house prices rose again by 13.3% from Q2 2010 to Q4 2012.
Recently, the government unveiled a plan to inject ISK9 billion (US$75 million) to bail out the country’s biggest mortgage lender, Housing Finance Fund (HFF). HFF issues inflation-indexed mortgages, and is struggling to repay its debts due to an inflation rate which exceeds 4%, putting HFF at a disadvantage to rivals providing standard mortgages. The government already injected ISK33 billion (US$260.9 million) into HFF in 2010.
Property prices in Iceland are expected to continue rising in the coming months. The Icelandic economy is expected to grow by 2% in 2013, and by another 2.5% in 2014, according to Statistics Iceland.
Capital Gains: Capital gains are taxed either as business income.
Inheritance: Inheritance, tax is imposed on the share of the beneficiary at 10%, with an exemption for the first ISK1,500,000 (€10,490) of the share.
Residents: Residents are taxed on their worldwide income.
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.
The banking sector in particular went on an ill-advised global lending binge. From 2004 to 2007, Iceland’s average GDP growth was 6.4% annually. But then three of its largest banks—Glitnir, Landsbanki, and Kaupthing—collapsed in 2008, defaulting on US$85 billion of debts.
Iceland’s external debt ballooned to ISK14.34 trillion (US$113.4 billion) in 2008, up 93% from a year earlier. It further rose to ISK15.2 trillion (US$120.2 billion) in 2009. In the second quarter of 2013, the country’s external debt fell to ISK578.38 billion (US$4.7 billion) from ISK608.09 billion (US$4.9 billion) in the previous quarter. GDP contracted by 6.6% in 2009 and by another 4.1% in 2010, according to the IMF.
The economy bounced back in 2011, with a real GDP growth rate of 2.9%, thanks to strong private consumption. Economic growth slowed to 1.6% in 2012.
In the second quarter of 2013, Iceland’s real GDP growth expanded 4.2% from the same period last year. However on a quarterly basis, real GDP growth contracted by 6.5% in Q2 2013, after registering a quarterly growth rate of 4.6% in Q1 2013.
The Icelandic economy is expected to grow by 2% in 2013 and by another 2.5% in 2014, according to Statistics Iceland. Private consumption is projected to increase by 1.6% this year while investment will contract by 3.1%.
The government’s budget deficit is projected at 2.7% of GDP this year, from 1.8% of GDP in 2012 and 5.4% in 2011.
In October 2013, the overall inflation rate in the country fell to 3.6%, down from 3.9% in the previous month. From an average of 12.3% from 2008 to 2009, the average inflation rate fell sharply to 4.9% from 2010 to 2012. In 2013, the country’s inflation rate is expected at slow modestly to 3.7%, according to the IMF.
In December 2007, the Iceland krone (ISK) was trading at about ISK62.18 = US$1. However, during the global financial crisis, the value of the krone plunged sharply to about ISK121.45 per US dollar in December 2008. Currency controls were imposed in November 2008 to protect the krona. Then in May 2013, the central bank took a more active role, intervening in the foreign exchange market to stabilize the exchange rate. Since April 2013, the krone has strengthened slightly, with an exchange rate of ISK120.37 = US$1 in October 2013 compared with ISK127.8 in January 2012.
“Looking ahead, there is uncertainty about how foreign debt deleveraging, the settlement of the failed banks’ estates, and capital account liberalisation will affect the exchange rate,” the central bank said.
After raising the benchmark rate by 125 basis points last year, the Central Bank of Iceland has kept the benchmark seven-day collateralised lending rate at 6% this year (in place since November last year) and reiterated that rate changes were directly tied to the results of the upcoming wage negotiations.
In September 2013, the country’s overall unemployment rate rose to 6.1%, up from 4.9% in August 2013. Iceland’s jobless rate is expected to fall to 5.1% in 2013, from 5.8% in 2012 and 7.4% in 2011, according to the IMF.