Iceland’s house prices surge

Lalaine C. Delmendo | July 17, 2021

After a decade-long house price boom, Iceland’s housing market continues to strengthen, amidst low interest rates and limited supply. Though the Central Bank’s key interest rate has just been raised, indexed mortgage rates continue to fall.

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.

Iceland house prices

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.

Key rate raised amidst rising inflation

In May 2021, the Central Bank of Iceland raised its benchmark seven-day deposit rate by 25 basis points to 1%.

“Inflationary pressures appear to be widespread, as underlying inflation is broadly similar to headline inflation. This is due to a number of factors, including the depreciation of the króna in 2020 and steep rises in wages and house prices,” said the central bank. “As a result, it is necessary to raise the Bank’s interest rates in order to ensure that inflation expectations are anchored to the target.”

In April 2021, annual inflation increased to an eight-year high of 4.6%.

“The economic impact of the pandemic is still uncertain,” said The Central Bank of Iceland in its April 2021 Financial Stability Statement. “The FSN considers it appropriate to continue monitoring the real estate market and credit growth, as it is important that supply and demand be in balance.”

“The Financial Stability Committee is prepared to use every tool at its disposal to safeguard financial stability in Iceland,” the central bank added.

Iceland’s great house price boom

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 5.1% annually.

After the financial crisis and the collapse of Iceland’s banks in 2008, GDP shrank by 7.7% in 2009 and by another 2.8% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1% (-32% inflation-adjusted).

Iceland house prices regions

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.

As the economy recovered, house prices rose by 13.3% between Q2 2010 to Q4 2012. But this rise was partly illusory since when adjusted for inflation, house prices rose by just 2.6% over the same period.

The economy expanded by an average of 4.1% per year from 2013 to 2019. Over the same period, house prices rose by 70.1% (50.5% inflation-adjusted).

During the boom years, property owners often received multiple offers as soon as their properties are listed for sale and sales prices were usually 4% to 8% above asking prices, particularly in the popular neighborhoods in downtown and western Reykjavik. Residential sales have risen by about 20% per year for four years, according to local real estate experts.

In 2020 nationwide house prices rose by 7.8% (4.1% inflation-adjusted), despite the COVID-19 pandemic.


Year Nominal Inflation-adjusted
2009 -8.32 -14.70
2010 -1.39 -3.78
2011 8.07 2.68
2012 4.57 0.35
2013 8.66 4.34
2014 6.09 5.22
2015 9.05 6.89
2016 14.68 12.55
2017 15.00 12.89
2018 6.90 3.04
2019 4.28 2.20
2020 7.77 4.05
Sources: Statistics Iceland, Global Property Guide

Increased demand for larger homes

The pandemic has seen increased demand for larger, more spacious single-family homes in Iceland.

“It’s clear that single-family homes, especially larger homes, have seen a rise in prices. Maybe this owes to the increased need for better and roomier housing following social restrictions,” saidÞorsteinnArnalds, Director of the Housing and Construction Authority.

“I don’t expect this trend to change in the capital area, as we don’t expect the supply of single-family homes to increase in the immediate future; it’s mainly apartment buildings that are being constructed.”

Residential construction activity mixed

Dwelling starts, as well as under construction, have begun to fall, amidst pandemic-related restrictions.


  • Dwelling starts fell by almost 37% to 2,406 units in 2020 from a year earlier, according to Statistics Iceland – in sharp contrast to a 50% rise in 2019 but still at par with the annual average of almost 2,400 units in the past five years.
  • Dwellings under construction fell by 26.6% y-o-y to 3,894 units in 2020, following an almost 17% increase in 2019.
  • Dwelling completions, which might have already started before the pandemic, rose by 25.8% y-o-y to 3,816 units in 2020, following a 31.7% rise in 2019.

In the capital, Reykjavik:

  • Dwelling starts fell 50.3% to 1,351 units in 2020 from a year earlier, in sharp contrast to the 112% increase recorded in 2019.
  • Dwellings under construction dropped 33.3% y-o-y to 2,347 units in 2020, from an annual growth of almost 24% in 2019.
  • Dwelling completions rose by 23.5% y-o-y to 2,527 units in 2020, following an annual increase of 42.6% in the prior year.

Iceland housing construction

According to Arion Research’s February 2021 report, Iceland’s residential market consists of around 145,000 apartments and houses. About 85% of the population are owner-occupiers while the remaining 15% are renters.

Shortage of affordable housing

There is a shortage of aff0rdable housing in all regions of Iceland, according to a report released by the Ministry of Social Affairs and the Housing Financing Fund. Accordingly, the shortfall range from 3,900 to 6,600 units.

According to Asgeir Jonsson, an economist at the University of Iceland, property developers and contractors have been catering to the luxury market, leaving demand for affordable housing largely unmet.

“They shouldn’t have stopped building in the suburbs, which are cheaper,” said one builder. “Apartments downtown are more expensive and less practical for families.”

In an effort to address the affordable housing shortage, the government announced in June 2017 that it would increase housing subsidies and the availability of land in the market. The new measure include:

  • Selling of a considerable area of government-owned land to Reykjavik City Council for construction;
  • Deregulation of housing and planning standards to speed up new residential construction;
  • Introduction of incentives to increase long-term rental housing;
  • Increase in rental benefit and special efforts to build low-cost housing for students and disabled individuals; and
  • Offering special support to families purchasing their first residential house.

Mortgage loans falling, despite low interest rates

In April 2021, the total amount of residential mortgage loans outstanding fell by 9.2% to ISK 551.27 billion (US$4.46 billion) from a year earlier, according to the Central Bank of Iceland – following a 4.6% fall in April 2020.

This is despite the fact that mortgage interest rates continue to fall. In June 2021, the general interest rate on indexed loans fell to 1.9%, from 2.3% in June 2020 and 3.55% two years ago.

Iceland residential mortgage loans

About 60% of household mortgages are indexed while the remaining 40% are non-indexed, according to Arion Research. CPI-linked mortgages are typically annuities, where the monthly payment, as well as the remaining principal, is indexed to the CPI.

Krona strengthens against major currencies

In May 2021, the Icelandic krona gained about 16.7% against the US dollar from a year earlier, with the monthly average exchange rate currently at ISK 123.132 = US$ 1. However the krona depreciated by about 4.7% against the euro, with the exchange rate at ISK 149.551 = EUR 1 in May 2021.

This partly offsets the 31% decrease in the value of krona against the US dollar and 22% against the euro from April 2018 to April 2020.

Iceland exchange rate

During the global financial crisis, the value of the krona plunged from ISK62.33 = US$1 to about ISK123.73 = US$1, from December 2007 to December 2008. To stabilize the krona, US$2.1 billion was borrowed from the IMF and exchange controls were imposed that were still in place in 2015.

As a result the krona gained about 38% against the US dollar and 21% against the euro from March 2015 to March 2018.

Tourism remains non-existent

More than a year after the COVID-19 pandemic broke out, tourism in Iceland remains almost non-existent. 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.

“Iceland’s dependence on tourism has made it highly exposed to health, economic, and financial contagion from the COVID-19 pandemic,” said the IMF in its April 2021 report. “Iceland stands out favorably in its handling of the pandemic, with fast containment of COVID-19 cases. Nonetheless, the collapse in global tourism flows has significantly affected Iceland´s engine of growth, which relies heavily on contact-intensive sectors,” noted the IMF.

Iceland tourist

Even before the pandemic, tourism was adversely impacted by the collapse of low-cost carrier WOW Air in March 2019, compounded by the grounding of the country’s flag carrier airline Icelandair’s Boeing 737 Max in March, after two new airplanes crashed in the preceding five months, killing hundreds of people aboard. As a result, tourist arrivals fell in 2019 by 14.1% y-o-y to 2,013,190 people, in sharp contrast to the average growth of 24% annually from 2013 to 2018.

Tourism accounts for almost 9% of Iceland’s GDP and 39% of total exports revenues.

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.”

Iceland gdp inflation

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.

Iceland unemployment

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.


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