During the year to November 2012:
- Prices of single-flat houses in Reykjavik increased 3.67% (-0.8% inflation-adjusted). Multi-flat houses in the capital saw a price increase of 7.1% (2.48% inflation-adjusted).
- Outside the capital, house prices dropped 2.09% (-6.31% inflation-adjusted), the biggest annual house price decline since February 2010.
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 Icelandís banks in 2008 saw GDP shrink by 6.8% in 2009 and by another 4% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1%.
To save the economy and to help homeowners, Icelandís state-controlled banks have forgiven mortgage loans for more than 25% of the population since end-2008, equivalent to about 13% of the countryís annual GDP.
The economy bounced back in 2011, with a real GDP growth rate of 3%. As the economy recovered, house prices rose again by 15.2% from Q2 2010 to Q3 2012.
The government now needs to bail out the countryís biggest mortgage lender, Housing Finance Fund (HFF). HFF, which issues mortgage loans indexed to inflation, is now struggling to repay its debts. An inflation rate exceeding 4% has put HFF at a disadvantage to rivals which provide standard mortgages. The government has already injected ISK33 billion (US$260.9 million) into HFF in new funds in 2010.
Property prices are now just 2.3% below their pre-crisis levels seen in Q1 2008. However when adjusted for inflation, property prices are still 29.4% below their peak levels.
The countryís housing market is expected to remain weak in the coming months, as the government struggles to deflate its ballooning public and external debt, which severely limits its ability to deal with future shocks.
In the third quarter of 2012, the countryís external debt stood at ISK13.14 trillion (US$103.9 billion), very large compared to Icelandís projected GDP of around US$13.5 billion in 2012.
The economy is expected to grow by about 2% in 2012 and by 2.5% in 2013, according to Moodyís Investor Service.
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 million (Ä6,033) 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 the past several years, the country has diversified into manufacturing and service industries.
The banking sector in particular went on an ill-advised global lending binge.†† From 2004 to 2007, Icelandís average GDP growth was 6.4% annually. But then three of its largest banksóGlitnir, Landsbanki, and Kaupthingócollapsed in 2008, defaulting on US$85 billion of debts.
To save the economy and to help homeowners, Icelandís state-controlled banks have forgiven mortgage loans for more than 25% of the population since end-2008, which was equivalent to about 13% of the countryís annual GDP.
Icelandís 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. Though external debt fell slightly to ISK13.9 trillion (US$109.9 billion) in 2010, these figures are huge compared to Icelandís GDP of US$12.5 billion.
GDP contracted by 6.8% in 2009 and by another 4% in 2010, according to the International Monetary Fund (IMF).† The economy bounced back in 2011, with GDP growth rate of 3%, thanks to strong private consumption.
The economy is expected to grow by about 2% in 2012 and by 2.5% in 2013, according to Moodyís Investor Service.† The governmentís budget deficit is projected to fall to about 2% of GDP in 2012, after a deficit of 5.4% of GDP in 2011.
Consumer prices rose by 4.5% during the year to November 2012, way above the central bankís target of 2.5%.† The central bank raised its key interest rate by 25 basis points to 6% in November, the fifth rise since August 2011. The surge in inflation is partly due to the 10% slide in the value of the krona against the euro since August.
In the third quarter of 2012, unemployment stood at only 5%, according to Statistics Iceland. In the capital region, unemployment was 5.5% while it was 4.1% in other regions.