Iceland's housing market continues to strengthen
Lalaine C. Delmendo | August 01, 2021

The nationwide residential property price index rose strongly by 12.68% (7.84% inflation-adjusted) y-o-y in May 2021 – more than double the 5.66% growth it registered a year earlier, according to Statistics Iceland. In fact it was the biggest y-o-y rise in more than three years.
During the year to May 2021:
- In Reykjavik, prices of single-flat houses soared by 19.57% (14.43% inflation-adjusted) – the highest y-o-y increase since October 2017. Likewise, prices of multi-flat houses increased 12.33% (7.51% inflation-adjusted).
- Outside the capital, residential property prices increased 8.27% (3.61% inflation-adjusted), slightly down from the prior year's 10.74% growth.
Despite the COVID-19 pandemic, demand remains surprisingly strong. In fact in March 2021, the country saw a record number of apartment sales of 1,300 units, according to a report released by the Housing and Construction Authority. Over the past 12 months, the number of purchase agreements is higher than any other 12-month period on record. More than 800 sales were concluded in the capital area in March 2021, the most in a month since March 2007.
In March 2021, the average sale time for an apartment in the capital area was 38 days – the shortest time on record.
Based on the same report, construction of about 3,950 units is necessary by end of this year to maintain stability in the housing market.
Iceland's economy contracted by 6.6% during 2020 – in contrast to 2.6% growth in 2019 and its worst performance since 2009. The economy is expected to grow by 3.7% this year, according to IMF projections – yet it is still not adequate to fully offset the decline last year.

Iceland experienced strong house price rises in recent years, mainly driven by booming tourism and robust economic growth. 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) last year.
House prices are expected to rise further by 10.5% in 2021 compared to the previous year, according to Landsbankinn's Department of Economics.
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.
Pandemic-induced economic contraction
Iceland’s economy contracted by 6.6% during 2020 – its worst performance since 2009. The economy is expected to grow by 3.7% this year, according to IMF projections – still not enough to offset the decline last year.“The outlook remains challenging,” said the IMF. “A modest recovery is projected to take hold this year, but uncertainty remains large. Recovery prospects in the tourism sector and the economy depend on control of the epidemic and progress in global and domestic vaccine distribution.”
In the first four months of 2021, there were only 17,745 stay-over tourist arrivals in the country, down by 95% from a year earlier, according to Icelandic Tourism Board, following an almost 76% fall during 2020.

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$120.9 billion) in 2008, up 99% from a year earlier. It further rose to ISK15.21 trillion (US$123.6 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 2.32 trillion (US$18.8 billion), according to the Central Bank of Iceland.

Despite the pandemic, the external debt increased only modestly to ISK 2.45 trillion (US$19.9 billion) in Q1 2021.
Though the general government deficit widened to 7.3% of GDP in 2020, a sharp rise from a shortfall of 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 April 2021, the seasonally-adjusted unemployment rate stood at 8.6%, up from 6.3% in April 2020 and 3.2% two years ago, according to Statistics Iceland.
With a population of only 364,000 in 2020, Iceland is one of the wealthiest and most developed countries in the world. GDP per capita is currently at US$65,000. 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.