Iceland's Residential Property Market Analysis 2025

Housing prices in Iceland continue to rise, although less steeply than before, and the experts foresee another strong year for the country’s residential market, supported by a growing young population and gradually improving lending conditions.

This extended overview from the Global Property Guide covers key aspects of Iceland's housing market and takes a closer look at its most recent developments and long-term trends.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Supply Highlights
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

House prices in Iceland continue to rise, though the pace of growth appears to be moderating. According to Statistics Iceland, the Nationwide Residential Property Market Price Index recorded a 7.94% year-on-year increase as of February 2025, down from 11.89% at its most recent peak in September 2024. In real terms, adjusted for inflation, the index increased by 3.58% compared to the corresponding period in 2024.

In the Capital Region, the price of detached houses rose by 9.15% year-on-year (4.73% inflation-adjusted), while the apartment segment experienced more moderate growth of 5.94% year-on-year (1.66% inflation-adjusted).

Iceland's house price annual change:

According to data from the Housing and Construction Authority (HMS), as of January 2025, the highest average purchase prices were recorded in the Capital Region, where the three-month average reached ISK 87,043,296 (USD 619,746), reflecting an 11.06% year-on-year increase. In municipalities surrounding the Capital Region, the average purchase price rose by 7.64% to ISK 64,603,678 (USD 459,976), while in rural areas, price growth was more subdued at 3.61%, with the average purchase price reaching ISK 52,442,008 (USD 373,386).

Data Source: HMS.

Detached houses exhibited stronger price appreciation compared to apartments. As of January 2025, the average purchase price of a detached house in the Capital Region increased by 11.67% year-on-year to ISK 145,296,331 (USD 1,034,506), nearly double the average purchase price of an apartment, which stood at ISK 75,977,558 (USD 540,958). Outside the Capital Region, the price differential between detached houses and apartments was less pronounced, although detached houses also experienced a higher rate of price acceleration.

Average purchase price of residential properties, by region and property type:

Looking ahead, home prices in Iceland are expected to continue rising, supported by improving financing conditions. However, the pace of growth is projected to remain moderate. "Although falling interest rates should, in principle, stimulate the housing market, several factors may limit their impact. First, indexed borrowing has increased significantly, with approximately 60% of outstanding housing loans now indexed. As a result, interest rate cuts have a limited effect on repayment burdens, given that indexed interest rates rose last autumn due to elevated real policy rates. Second, while nominal interest rates have declined and may continue to ease slightly in the coming months, real policy rates are expected to remain high until inflation nears target levels and economic demand slows further," note experts from Landsbankinn.

Demand Highlights:

State-Led Buyouts, Improving Lending Conditions, and Population Growth Drive Transaction Surge

Iceland, with a population of approximately 390,000 as of the beginning of 2025, has a relatively small yet expanding real estate market. The majority of activity is concentrated in Reykjavik and the surrounding Capital Region, home to about two-thirds of the population. The country's housing market is characterized by strong demand and limited supply, constrained by strict zoning regulations and a national commitment to preserving natural landscapes.

According to data from HMS, 13,187 residential property purchase agreements were registered in the country in 2024, marking a 42.35% year-on-year increase. This sharp rise in market activity can be partially attributed to the operations of Þórkatla, a state-owned real estate company established to address housing challenges within the urban area of Grindavík following increased volcanic activity.

HMS indicates that in 2024 Þórkatla acquired 942 properties, significantly contributing to the overall transaction volume. Additionally, the displacement of Grindavík residents led to increased demand in neighboring municipalities, resulting in 765 property purchases by former Grindavík residents last year. Nevertheless, even when excluding transactions linked to Þórkatla and Grindavík-related relocations, the market still recorded a robust year-on-year increase of 23.92% in registered purchase agreements.

Data Source: HMS.

Geographically, the Capital Region remained the primary hub of real estate activity, accounting for 7,813 purchase agreements, or 59% of total market transactions. The highest year-on-year growth, at 60.92%, was recorded in the Southern Peninsula, the epicenter of Þórkatla-related buyouts. In contrast, the Eastern Region was the only area to experience negative growth.

Number of registered purchase agreements for residential properties, by region:

Housing demand remained strong in early 2025, with 1,567 purchase agreements registered in January and February - closely mirroring the levels seen in 2024. While most of Þórkatla's real estate activities took place last year, with the deadline for Grindavík residents to apply to sell their homes set for March 31, 2025, experts anticipate another strong year for the market, driven by favorable lending conditions. "We believe demand will continue to be considerable, especially as interest rates continue to fall. Many people who clearly want to buy an apartment but have not been able to due to tight loan conditions at the Central Bank and high interest rates will now be able to," noted Jónas Atli Gunnarsson, economist at HMS.

A key longer-term factor influencing demand is Iceland's growing population of young adults, the primary demographic for first-time home purchases. According to Statistics Iceland, over 44,000 individuals aged 22-29 lived in the country at the start of 2024, up from just under 38,000 in 2016. "We have noticed significant population growth in Iceland, but what is more interesting is that this growth is being driven by people in this [22-29] age group, and such population expansion needs to be met with new housing," commented Gunnarsson.

Supply Highlights:

Residential Completions are Strong, but Future Development Faces Uncertainty

HMS reports 3,486 new dwellings completed in Iceland in 2024, representing a 13.22% increase compared to the previous year. This upward trend continued into early 2025, with 585 dwellings completed in January and February, marking a 37.65% increase compared to the corresponding period of 2024.

Despite this strong start, the authority forecasts total completions for 2025 to range between 3,100 and 3,600 units, followed by a decline to 2,400-3,000 units in 2026. A modest rebound is expected in 2027, with projected completions reaching 2,600-3,400 units. At the same time, the report notes that variations in construction timelines and uncertainty regarding new project initiations may affect these estimates.

*HMS forecast. Note: Chart data indicates the lower bracket of HMS forecast. Data Source: HMS.

Forward-looking indicators also suggest a slowdown in completions in the coming years. According to HMS's biannual construction census, as of March 2025, 7,181 dwellings were under construction at various stages of development nationwide - a 9.93% decline compared to the previous year. The most significant reductions were recorded in the Capital Region (-23.13%) and the City of Reykjavík (-7.49%). In contrast, construction activity increased in municipalities in the vicinity the Capital Region (+5.34%) and other rural areas (+5.54%). HMS warns that without an increase in new construction before the next census, a decline in housing supply is likely. "If new construction does not pick up further before the next count, it is likely that there will be a decline in the supply of new housing units in the coming years," the HMS report states.

Data Source: HMS.

During a panel discussion held by HMS with Iceland's ten largest residential developers, industry leaders identified unpredictable planning processes and a limited supply of building plots as key barriers to residential development. They cited delays in municipal planning, lengthy approval procedures, and inconsistent policymaking as primary contributors to uncertainty and rising development costs. Additionally, municipal fees and land encumbrances were reported as significant challenges, with concerns that some municipal service fees are not proportionate to the actual cost of service provision.

Developers also highlighted that municipal requirements on apartment sizes have led to an oversupply of larger units, which do not align with current market demand. Furthermore, elevated interest rates have significantly impacted financing conditions, prompting many companies to scale back new projects due to increased borrowing costs.

Rental Market:

Rent Increases Still Outpacing General Inflation

Despite the overall disinflation trend observed in Iceland throughout 2024 and early 2025, rental inflation in the country remains elevated, with the actual rentals for housing component of the consumer price index (CPI) reported by Statistics Iceland outpacing the growth of the all-items CPI since mid-2023. In February 2025, the actual rentals sub-index recorded a 10.0% annual change, while the general consumer goods inflation stood at 4.2%.

The strong growth of actual rents in Iceland is also reflected in the movement of the HMS rental price index for the capital region, which demonstrated a 1.0% month-on-month and 11.4% year-on-year growth in February 2025.

A recent analysis from HMS ties persistent rental inflation in the country to elevated interest rates and the overall cost of borrowing. "Over the past 13 years, there has been a strong correlation between mortgage payments and rental prices. A large proportion of landlords make mortgage payments on their rental apartments and in recent years have partly passed on the increased mortgage payment burden to tenants," says the 2025 Rental Market Roadmap report from the authority.

At the same time, the HMS analysis of valid lease agreements shows that as of January 2025, rental prices in about 70% of contracts were linked to the CPI, and only about 30% of contracts were not index-linked. In CPI-linked contracts, prices are typically updated monthly, which means that the general price dynamic directly affects rents in the majority of existing contracts.

In September 2024, amendments to the Rent Act No. 36/1994 regulating the market in Iceland went into force, now generally prohibiting indexation and price changes in shorter lease agreements of 12 months or less.

Data Source: Statistics Iceland.

In nominal terms, the average market rent in newly registered contracts in Iceland reached ISK 263,318 (USD 1,874) per unit in February 2025, according to HMS data. 1-room units were rented for ISK 186,861 (USD 1,330) a month, 2-room units for ISK 241,645 (USD 1,720) a month, and 3-room units for ISK 284,042 (USD 2,022) a month, on average.

Regionally, the highest average rents per square meter were observed in Reykjavik at ISK 4,041 (USD 28.76) and Kópavogur at ISK 3,810 (USD 27.12), both standing notably above the national average of ISK 3,639 (USD 25.90).

Average market rent in newly registered contracts by submarket:

In general, the rental market in Iceland has grown in importance over the past decades, leading to an increased share of rental properties in the overall dwelling stock, accelerated rental inflation, and active development of institutional landlords. "Rapid population growth due to immigration and rising housing prices outpacing rents have increased demand for rental housing. In this environment, large for-profit rental companies have emerged while the government has also supported the development of non-profit rental companies," noted HMS in their recent analysis of the market.

Gross rental yields for all dwellings in Iceland averaged 5.20%, according to research by the Global Property Guide conducted in April 2025. Among the monitored regional submarkets, the average yield observed in Reykjavík was 4.88%, while the islands' average stood at 5.20%.

According to the authority's surveys on housing patterns, around 16% of adults in Iceland were in the rental market in 2024, an increase from 13% in 2020, which is generally consistent with the earlier household tenure status estimates from Statistics Iceland. At the same time, HMS believes that the available data held by public bodies in the country is insufficient to assess the true size of the market and suggests around 37 thousand adults (primarily foreigners) might be currently undercounted in the surveys, which would bring the actual share of tenants in Iceland to 29% of the adult population.

According to the HMS rental market survey conducted in 2024, 41% of tenants in Iceland rent from individual private landlords, 17% from friends and relatives, about 11% from private rental companies, and about 8% from municipalities. The remaining tenants are split between non-profit rental companies, specialized student housing, and housing associations.

Mortgage Market:

Monetary Policy Easing and Signs of Increased Demand for Non-Indexed Loans

The Central Bank of Iceland (CBI) started relaxing its monetary policy in October 2024, with four consecutive cuts bringing the key interest rate down 150 b.p. to the current standing of 7.75%. Commenting on the most recent decision in March 2025, the regulator noted that the inflation registered in Iceland in the previous month was at the lowest level observed in four years, prompting the policy shift. At the same time, the persistent inflationary pressures and global economic uncertainty call for caution in terms of further moves. "The decline in inflation has been broad-based, and underlying inflation has therefore fallen as well. The outlook is for continued disinflation in coming months. <…> Although inflation has eased and inflation expectations have fallen in the recent term, inflation pressures remain, which calls for a continued tight monetary stance and caution regarding decisions going forward," said the CBI.

Market participants in Iceland expect interest rates to continue to decline gradually. Íslandsbanki, one of the country's largest banks, predicts that the cuts will continue until mid-2026, with the policy rate reduced to 6.5% by the end of this year and to 5.5%-5.0% in the latter half of the forecast horizon.

Data Source: CBI.

In line with the central bank's key rate, the weighted average interest rates on new mortgages to households, reported by the CBI based on data from the domestic systemically important banks, started going down for mortgages not indexed to inflation. The latest available figures from January 2025 show the average variable rate for this category of loans at 10.28% (down from 10.78% in October and 10.94% in January 2024) and the average fixed rate at 9.22% (down from 9.61% in October and 9.92% in January 2024).

The reversal of the trend is yet to reflect in officially reported interest rates on inflation-indexed mortgages, however. The average variable rate for this category of loans in January 2025 stood at 4.87% (up from 4.70% in October and 3.98% in January 2024) and the average fixed rate was recorded at 5.10% (up from 4.78% in October and 4.05% in January 2024).

At the time of research in March 2025, the best offers for non-indexed mortgages in Iceland's largest commercial banks ranged between 9.50%-9.75% (variable rate) and 8.00%-8.30% (fixed rate). Indexed mortgages were offered at 4.00%-5.00% (variable rate) and 4.35%-4.80% (fixed rate).

Data Source: HMS.

Based on the latest HMS data, net new housing loans to households from financial institutions in Iceland (including banks, pension funds, and HMS) totaled ISK 157.2 billion (USD 1.1 billion) in 2024, demonstrating an 18.1% year-on-year increase after two years of sharp declines. The pick-up in new lending in recent months was primarily driven by indexed mortgages granted by banks.

Overall, due to a history of persistent inflation and high interest rates, Iceland's mortgage system is largely based on so-called indexed loans, which offer lower nominal rates and initial payments in combination with inflation-based indexation of the loan principal. While indexed loans continue to represent the majority of the Icelandic mortgage market, the traditional non-indexed mortgages previously gained popularity during the period of historically low interest rates in 2020-2021, and, according to the latest reporting from HMS, there are currently indications of increased demand for this type of loans, along with declining interest rates.

The total value of outstanding residential mortgages maintained by the deposit-taking corporations (DTC) in Iceland continued to expand (7.1% annual growth in 2024, following 5.1% in 2023 and 9.9% in 2022), reaching ISK 1.94 trillion (USD 13.8 billion) in February 2025. Represented as a percentage of GDP, DTC mortgages climbed down from the peak level of 48% in 2021 to an estimated 42% in 2024.

According to HMS, the total amount of outstanding household loans secured by residential property in Iceland (combining credit extended by bank and non-bank lenders) amounted to about ISK 2.76 trillion (USD 19.6 billion) as of February 2025. Of those, 70.6% are loans issued by banks, 24.7% are loans from pension funds, and 4.7% are HMS loans. Indexed mortgages make up 62% of the stock. The relative size of the combined stock is estimated to equal 59.7% of the annual GDP at current prices.

Statistics Iceland estimates that as of 2022, more than half of households in the country (52.3%) were homeowners with mortgage.

Data Source: CBI.

Socio-Economic Context:

Diversification of Economy to Support Growth After Recent Cooldown

Following a strong 5.0% growth in 2023, Iceland's economy slowed considerably through 2024 due to weak private consumption dampened by inflation and subdued growth of exports, with the annual real GDP growth standing at just 0.6%, according to the International Monetary Fund (IMF) data. The IMF believes the Icelandic economy was operating significantly above capacity in 2022 and early 2023, leading to the more recent cooling. The growth, however, is expected to pick up pace this year, reaching 2.4% in 2025 and 2.2% in 2026. These figures are in line with the latest forecast from the European Commission, which sees the indicator at 2.5% in 2025 and 2.4% in 2026.

Consumer Price Index (CPI) inflation in the country eased from the 2023 peak of 8.7% to 6.0% in 2024 and was most recently reported by Statistics Iceland at 4.2% in February of 2025, allowing the central bank to start easing its monetary policy in recent months. The European Commission projects the indicator to moderate further in 2025-2026 due to a modest increase in import prices and slower growth of unit labor cost. The IMF forecast currently anticipates the annual inflation to fall to 3.3% in 2025 and 2.5% in 2026. The CBI expects inflation in the country to reach the target by 2027.

Data Source: IMF.

In Iceland's labor market, strong immigration had eased constraints on the supply of labor, leading to a notable decline in unemployment in recent years, the seasonally adjusted rate and trend reported by Statistics Iceland at 5.5% and 4.0%, respectively, in February 2025. In the upcoming periods, the IMF expects slower employment growth to be matched by lower inflows into the labor force, resulting in unemployment stabilizing close to the 4% neutral rate.

According to the labor force register data published by Statistics Iceland, the share of foreign workers in the employed population increased from 11.1% a decade ago in 2014 to 23.9% in 2024, with the majority of immigrants being employed in the construction, tourism, and fishing sectors.

Data Source: Statistics Iceland.

In recent years, Iceland has been experiencing a surge in seismic activity, including ten volcanic eruptions. The most recent series of fissure eruptions started on Reykjanes Peninsula at the end of November 2024 and lasted 18 days, marking the seventh incident in the area since December 2023.

While the impact of most recent events was highly localized and the broader economic implications of the ongoing volcanic activity are limited, the area around the town of Grindavík has been declared unsafe, and the eruptions have absorbed the attention of policymakers, according to the IMF assessment.

Overall, the medium-term growth prospects remain favorable for Iceland. "Following an impressive recovery from the COVID pandemic and commodity price shocks in recent years, a coordinated tightening of monetary and fiscal policies has successfully slowed domestic demand growth, strengthened the current account, and started to lower inflationary pressures. <…> Efforts to diversify the economy towards innovation-based sectors are expected to support productivity growth and increase the resilience of the economy to shocks, while immigrant labor inflows - although more modest than in recent years - will facilitate continued employment growth," said the IMF in their 2024 Article IV Staff Report.

The European Commission forecast also outlines the trajectory of a gradual recovery, supported by more accommodative monetary policy and improving external demand, as well as expansion of innovation-based sectors.

In February 2025, Fitch Ratings affirmed Iceland's 'A' standing with a stable outlook, pointing out the country's very high income per capita and governance indicators and strong fundamentals, including sizeable pension fund assets and a sound banking sector. For the time being, Iceland's rating remains constrained by the overall small size of its economy and limited export diversification (the bulk of exports represented by traditional sectors, such as aluminum, tourism, and marine products). Steady progress, however, continues to be made in developing higher-value sectors, such as pharmaceuticals, information and communications technology, and biotechnology.

Sources:

1. Statistics Iceland
   1. Census 2021: https://www.statice.is/
   2. National Accounts: https://www.statice.is/
   3. Labor Force Survey: https://www.statice.is/
   4. Labor Force Register Data: https://www.statice.is/
   5. Consumer Price Index: https://www.statice.is/
   6. Housing: https://www.statice.is/
   7. Tourism: https://www.statice.is/
   8. Economic Forecast: https://www.statice.is/
   9. Economic Forecast, November 2024: https://www.statice.is/
   10. Residential Property Market Price Index: https://px.hagstofa.is/
   11. Iceland's Population as of Jan 2025 (press release): https://statice.is/
2. Central Bank of Iceland (CBI)
   1. Key Interest Rate: https://www.cb.is/
   2. Statement of the Monetary Policy Committee 19 March 2025: https://www.cb.is/
   3. Publications: https://www.cb.is/
   4. Monetary Statistics: https://www.cb.is/
   5. Restrictions on Mortgage Lending: https://www.cb.is/
   6. Economic Forecast, November 2024: https://www.statice.is/
3. Icelandic Parliament (The Althingi)
   1. Rent Act No. 36/1994 (IS): https://www.althingi.is/
4. Ministry of Finance and Economic Affairs
   1. The Icelandic Economy: https://www.government.is/
5. Housing and Construction Authority (HMS)
   1. Housing Market Report, March 2025 (IS): https://hms.is/
   2. Housing Market Report, February 2025 (IS): https://hms.is/
   3. Interest Rate Table (IS): https://hms.is/
   4. Housing and Rental Price Indices (IS): https://hms.is/
   5. Turnover and Number of Purchase Agreements (IS): https://hms.is/
   6. Key Figures from the HMS 2024 Rental Market Survey (IS): https://hms-web.cdn.prismic.io/
   7. Rental Market Roadmap 2025 (IS): https://hms.is/
   8. The Rental Price Index Rose by 1 Percent in February 2025 (IS): https://hms.is/
   9. Lease Agreements by Type of Landlord (IS): https://hms.is/
   10. Apartments Under Construction, March 2025 (IS): https://hms.is/
6. European Commission
   1. Autumn 2024 Economic Forecast for EFTA Countries: https://economy-finance.ec.europa.eu/
7. International Monetary Fund (IMF)
   1. Country Overview: Iceland: https://www.imf.org/
   2. 2024 Article IV Staff Report: https://www.imf.org/
8. Fitch Ratings
   1. Fitch Affirms Iceland at 'A'; Outlook Stable: https://www.fitchratings.com/
9. Visit Iceland
   1. Volcanic Activity Has Stopped on Reykjanes Peninsula: https://www.visiticeland.com/
10. Islandsbanki
    1. Macroeconomic Forecast: Tailwinds Picking Up Speed: https://www.islandsbanki.is/
    2. Interest Table: https://www.islandsbanki.is/
11. Arion Bank
    1. Interest Rate Table (IS): https://www.arionbanki.is/
12. Landsbankinn
    1. Interest Rate Table (IS): https://www.landsbankinn.is/
    2. Housing Prices Jumped in January (IS): https://www.landsbankinn.is/
13. RÚV
    1. First-Time Buyer Increase Expected: https://nyr.ruv.is/