Despite low supply, Iceland economy improves
Lalaine C. Delmendo | February 13, 2022
The nationwide residential property price index rose strongly by 22.88% (12.93% inflation-adjusted) during the year to Q2 2022 – double the 12.63% growth it registered a year earlier, according to Statistics Iceland. In fact it was the biggest y-o-y rise since Q2 2017.
During the year to Q2 2022:
- In Reykjavik, prices of single-flat houses soared by 22.12% (12.24% inflation-adjusted) – the highest y-o-y increase since Q3 2017. Likewise, prices of multi-flat houses increased 22.84% (12.89% inflation-adjusted).
- Outside the capital, residential property prices increased sharply by 23.75% (13.73% inflation-adjusted), almost triple the prior year's 8.19% growth.
Despite strong demand, housing supply remains very limited. In February 2022, the total number of apartments for sale has dramatically declined from about 4,000 available units in May 2020 to just 1,000 units, according to the Housing and Construction Authority. In the capital area, available properties dropped from 900 units to just 70 units over the same period.
“At first, the price increases were driven by hefty interest rate cuts, but now a supply shortage plays a more prominent part,” said Arion Bank in its Q1 2022 report.
Iceland experienced strong house price rises in recent years, mainly driven by booming tourism, robust economic growth and limited housing supply. From 2010 to 2019, residential property prices surged 109% (62% inflation-adjusted), including a growth of 15% per year in 2016 and 2017. Despite the health crisis, prices continued to rise by 7.8% (4.1% inflation-adjusted) in 2020 and by another 15.9% (10.2% inflation-adjusted) in 2021.
House prices are expected to continue rising by double-digit figures this year, amidst strong demand, as well as limited housing supply.
Iceland's economy grew by 4.3% during 2021, partially offsetting the 7.1% contraction recorded in 2020, buoyed by robust domestic demand and favorable terms of trade. The economy is expected to continue growing in the next two years, albeit at a slower pace of 3.3% this year and 2.3% in 2023, based on projections released by the IMF.
Analysis of Iceland Residential Property Market »
Rental income taxes are moderate in Iceland
Rental Income: Nonresidents earning rental income are taxed at a flat rate of 22%. Only 50% of the gross rent is taxable for income earned from leasing residential properties.
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.
Very low transaction costs in Iceland
Round-trip transaction costs are very minimal from 2.40% to 3.40%. The buyer shoulders all costs when buying property, which include real estate agent's fee, stamp duty, and registration fee.
Economy improving
Iceland’s economy grew by 4.3% during 2021, partially offsetting the 7.1% contraction recorded in 2020, buoyed by robust domestic demand and favorable terms of trade.The economy is expected to continue growing in the next two years, albeit at a slower pace of 3.3% this year and 2.3% in 2023, based on projections released by the IMF.
“Growth is expected to remain moderate in 2022 and the medium term,” said the IMF. “Despite Iceland’s low direct exposure to Russia and Ukraine, the country will face an environment of lower external demand, supply chain disruptions, and higher foreign inflation.” Despite this, Iceland’s economy remains well positioned to handle potential negative shocks.
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. Economic growth slowed sharply in 2008, and contracted by a huge 7.7% in 2009 and by another 2.8% in 2010. Iceland’s external debt ballooned to ISK14.88 trillion (US$108.1 billion) in 2008, up 99% from a year earlier. It further rose to ISK15.21 trillion (US$110.5 billion) in 2009.
The economy recovered since, with an annual average growth of 3.5% from 2011 to 2019. In line with this, external debt started to fall again. By 2019, the country’s external debt was just ISK 2.36 trillion (US$17.1 billion), according to the Central Bank of Iceland.
Despite the pandemic, the external debt increased only modestly to ISK 2.48 trillion (US$18 billion) in 2020 and to ISK 2.75 trillion (US$19.9 billion) in 2021.
Though the general government deficit widened to 8.7% of GDP in 2020 and to 8.9% of GDP in 2021, a sharp rise from a shortfall of just 1.5% in 2019 and surpluses of 0.9% in 2018, 1% in 2017 and 12.5% in 2016, due to a surge in government spending, coupled with lower revenues.
In May 2022, the seasonally-adjusted unemployment rate stood at 3.5%, sharply down from 5.9% in the previous year and 8% two years ago, according to Statistics Iceland.
With a population of only 369,000 in 2021, Iceland is one of the wealthiest and most developed countries in the world. GDP per capita is currently at US$69,000. 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.