Iceland is on a crazy house price boom fuelled by tourism
September 02, 2017
Iceland´s house prices are now soaring. The nationwide residential property price index surged by 23.15% (21.28% inflation-adjusted) during the year to Q2 2017, almost triple the annual growth of 8.06% the previous year, according to Statistics Iceland - the highest year-on-year increase since Q1 2006.
- In Reykjavik, prices of single-flat houses surged by 25.5% (23.5% inflation-adjusted). Prices of multi-flat houses increased 24.5% (22.6% inflation-adjusted) y-o-y to Q2 2017.
- Outside the capital, residential property prices increased 15.2% (13.4% inflation-adjusted).
During the latest quarter, Q2 2017, Iceland´s house prices rose by 6.53% (5.76% inflation-adjusted).
Currently, the average residential property price in Reykjavik ranges from ISK4o million (US$382,500) to ISK50 million (US$478,130), according to Jason KristinnOlafsson of Miklaborg Real Estata. The central region has seen the highest increase in property prices during the previous year because of limited supply.
Iceland´s economy grew by a blazing 7.2% in 2016, after growth of 4.1% in 2015, 1.9% in 2014 and 4.4% in 2013. In 2017,the economy is expected to expand by 6%, private consumption by 6.9% and investment by 9.8%, according to Statistics Iceland.
The continued increase in property demand has been fuelled by booming tourism. In 2016, foreign visitor arrivals rose by 39% to about 1.79 million, according to Icelandic Tourism Board. During the first seven months of 2017, stay-over tourist arrivals increased 33.1% to around 1.25 million people compared to the same period last year.
Most of the tourists come from the United States (27.3%), the United Kingdom (15.6%), Germany (7.2%), Canada (4.7%), France (4.6%), and China (3.7%).
"With increased tourism there are now more foreign buyers every year," says IngólfurGissurarson at Valhöll estate agency. "There are plenty of high-end, centrally-located developments coming on the market."
"Most of the foreign buyers tend to be from the US," says GrétarJónasson of Iceland´s Association of Real Estate Agents, "but Icelanders living abroad are now buying second homes in Iceland."
In 2017, about 2.2 million tourists are expected to visit Iceland, more than 20% growth from the previous year.
Despite surging demand, residential construction remains far below peak levels. In 2016, there were just 1,133 dwelling starts in Iceland, down 29.7% from a year earlier and far below the annual average of 3,500 units from 2003 to 2008. Dwelling completions increased 35.1% y-o-y to 1,513 units in 2016 - also far below the annual average of 2,900 units from 2003 to 2008.
"Prices have risen sharply in the recent term because new construction has been unable to keep pace with demand stemming from population growth and the tourism boom," said the country´s Ministry of Finance.
The boom seems likely to continue.
"We expect the housing market to continue along an upward trajectory in 2017 with prices increasing by 14-16% in Reykjavik and vicinity," said SölviBlöndal of GAMMA Capital Management. "Demand will grow, supported by demographic factors and a continued increase in the purchasing power. Supply will remain limited in 2017 but is expected to pick up in 2018."
In a recent reportArion Bank predicts that house prices will rise by about 15% this year, 9.7% next year, and 7.5% in 2019.
Then it was banking, now it is tourism
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.
However, the collapse of Iceland´s banks in 2008 saw GDP shrink by 6.9% in 2009 and by another 3.6% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1% (-32% inflation-adjusted).
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 GDP growth of 2%. In 2012, the country´s economic growth was 1.2%.
As the economy recovered, house prices rose - by 13.3% between Q2 2010 to Q4 2012. But this rise was partly illusory: when adjusted for inflation, house prices rose by just 2.6% over the same period.
The housing market has however grown robustly in the past four years, as the economy expanded by an average of 4.4% per year from 2013 to 2016:
- In 2013, house prices rose by 8.7% (4.3% inflation-adjusted) from a year earlier.
- In 2014, house prices rose by 6.1% (5.2% inflation-adjusted) from a year earlier.
- In 2015, house prices increased 9.1% (6.9% inflation-adjusted) from a year earlier.
- In 2016, house prices rose by 14.7% (12.5% inflation-adjusted) from a year earlier.
"Properties usually sell very fast," said AsdisOskValsdottir of property listing agency Husaskjol. "And apartments with one, two and three bedrooms usually sell within days."
Property owners often receive multiple offers as soon as their properties are listed for sale and sales prices are 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 three years, according to local real estate experts.
Residential construction remains low
- Dwelling starts fell by 29.7% to 1,133 units in 2016 from a year earlier, according to Statistics Iceland. From 2003 to 2008, the average dwelling starts was 3,500 units per year.
- Dwellings under construction dropped 10.5% y-o-y to 3,255 units in 2016, in contrast to 5,300 units annually from 2004 to 2009.
- Dwelling completions increased 35.1% y-o-y to 1,513 units in 2016 -still far below the annual average of 2,900 units from 2003 to 2008.
In the capital, Reykjavik:
- Dwelling starts dropped 38.3% to 933 units in 2016 from a year ago and far below the annual average of 2,150 units from 2003 to 2008.
- Dwellings under construction dropped 12.4% y-o-y to 2,128 units in 2016, in contrast to 3,100 units annually from 2004 to 2009.
- Dwelling completions surged 40.7% y-o-y to 1,234 units in 2016, but still below the annual average of 1,800 units from 2003 to 2008.
The low construction activity is viewed a major reason for the surge in house prices.
"Prices are very inflated, mainly because of shortage of housing," said VilhjalmurBjarnason, chairman of industry association HagsmunasamtokHeimilanna. "Very few new homes or building projects have been initiated by the municipal authorities in Reykjavik since 2008."
In an effort to address the 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.
Krona strengthens against major currencies
In early-2016, the krona started to appreciate. By July 2017, it had risen in two years by 28% against the US dollar and 22% against the euro.
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.
Robust economic growth, improving public finances
In the first quarter of 2017, Iceland´s annual GDP growth was 7.6%. In 2016, the Icelandic economy expanded by a spectacular 7.2%, after 4.1% in 2015, 1.9% in 2014, 4.4% in 2013, and 1.2% in 2012, buoyed primarily by a boom in tourism as well as strong private consumption and investment.
The Icelandic economy is expected to expand by 5.3% this year, and by another 2.6% in 2018, according to the Organisation for Economic Co-operation and Development (OECD). Statistics Iceland is more optimistic, projecting 6% growth this year. Private consumption is projected to increase by 6.9% this year and gross fixed investment by 9.8%.
From 2004 to 2007, Iceland´s average GDP growth was 6.4% 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. GDP contracted by 4.7% in 2009 and by another 3.6% in 2010, according to the IMF. Iceland´s external debt ballooned to ISK14.34 trillion (US$125.6 billion) in 2008, up 93% from a year earlier. It further rose to ISK15.2 trillion (US$133.2 billion) in 2009.
External debt started to fall again in 2010, as the economy recovered. By Q1 2017, the country´s external debt was just ISK2.78 trillion (US$26.6 billion), according to the Central Bank of Iceland.
In 2016, the Icelandic government recorded a budget surplus of 12.9% of GDP. Inflation remains low at 1.8% in July 2017, according to Statistics Iceland.
In August 2017, the Central Bank of Island kept its benchmark seven-day deposit rate at 4.5%, after cutting it twice in the past three months, in response to the strengthening domestic currency.
In July 2017, the seasonally-adjusted unemployment rate fell to just 1.8%, from 2.9% a year earlier, 4% in 2015, 5% in 2014, 5.4% in 2013, 6% in 2012 and 7.1% in 2011, according to the central bank.
With a population of only 336,000 in 2016, Iceland is one of the wealthiest and most developed countries in the world. GDP per capita was US$59,629 in 2016, according to theIMF. 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.
- Iceland’s house prices surging, amidst healthy economic growth - October 04, 2016