Iceland Real Estate Market Overview 2022

After a decade-long house price boom, Iceland’s housing market continues to strengthen, amidst limited supply in the market coupled with improving economic conditions.

Iceland’s house price annual change

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, the housing supply remains very limited. In February 2022, the total number of apartments for sale 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.

Iceland house prices regions

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.

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).

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.

Despite the Covid-19 pandemic, nationwide house prices still managed to rise by 7.8% (4.1% inflation-adjusted) in 2020 and even accelerated in 2021 to reach a record growth of 15.9% (10.2% inflation-adjusted).


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
2021 15.85 10.22
Sources: Statistics Iceland, Global Property Guide

IMF urges Iceland to cool the housing market

The International Monetary Fund (IMF) has recently urged Iceland to implement macroprudential measures, in addition to the ongoing monetary tightening, to cool the heating housing market and avoid a disastrous crash. Risks in the banking system have risen in recent years due to surging house prices.

“A sharp correction in house prices could weaken the balance sheets of households and the financial sector. The house price surge has also worsened housing affordability, particularly for young and lower-income households. Well-calibrated and coordinated policies are crucial to navigating the house price cycle,” said the IMF.

“Further macroprudential tightening through binding and effective debt service-to-income caps is needed to contain growing housing risks,” the IMF added.

Some of the measures recommended by the IMF include:

  • Requiring mortgage lenders to apply a premium over the contractual rate in the analysis of borrowers’ debt-service capacity;
  • Introducing a cap on the debt-to-income ratio;
  • Reducing administrative burdens in the construction sector and increasing housing supply to address housing affordability;
  • Simplifying planning regulations, easing the process of obtaining building permits, introducing a one-stop shop for permits and inspections, and;
  • More targeted rental housing assistance and continued investment in social housing to promote rent affordability.

Last year, Iceland’s central bank cut the maximum loan-to-value ratio to 80% from 85%, in an effort to rein in one of Europe’s fastest house-price rallies. But almost a year after it was implemented, there is little evidence of a cooling effect so far.

Supply remains limited

The total number of apartments for sale has dramatically declined from about 4,000 available units in May 2020 to just 1,000 units by early-February 2022, according to the Housing and Construction Authority.

In the capital area, available properties dropped from 900 to just 70 over the same period.

Iceland housing construction

The number of dwelling starts, as well as projects under construction, began to fall in 2020 and have remained weak in 2021, amidst pandemic-related restrictions.

Countrywide (in 2020 – the latest figures available from Statistics Iceland):

  • Dwelling starts fell by almost 37% to 2,406 units in 2020 from a year earlier – 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’s residential market consists of around 145,000 apartments and houses, according to Arion Bank. About 85% of the population are owner-occupiers while the remaining 15% are renters.

Shortage of affordable housing

There is a shortage of affordable housing in all regions of Iceland, according to a report released by the Ministry of Social Affairs and the Housing Financing Fund. Accordingly, about 2,800 to 3,000 units are expected to be built this year – still lower than the required construction of 3,900 to 6,600 new units to stabilize the market.

According to Asgeir Jonsson, an economist at the University of Iceland, property developers, and contractors have been catering to the luxury market, leaving the 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.”

To address the problem, a working group established by Prime Minister Katrin Jakobsdóttir has recently proposed to build about 35,000 apartments over the next ten years. More specifically, the group recommends building at least 4,000 units annually in the next five years and, 3,000 units annually for years thereafter.

Earlier, the government announced that it would increase housing subsidies and the availability of land in the market. The measure includes:

  • 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 benefits and special efforts to build low-cost housing for students and disabled individuals; and
  • Offering special support to families purchasing their first residential house.

Interest rates rising sharply to curb soaring inflation

The Central Bank of Iceland raised its key interest rate by 100 basis points to 4.75% in June 2022, its sixth consecutive rate hike in a year, in an effort to curb surging consumer prices.

Inflation climbed to 8.8% in June 2022, the highest reading since October 2009, amidst soaring global energy prices and domestic house prices.

Iceland interest rates

“As before, house prices and other domestic cost items are strong drivers of inflation, and global oil and commodity prices have risen sharply as well. Price hikes are widespread, and underlying inflation has risen. Inflation expectations have risen by most measures and are above target,” said the central bank in its June 2022 Monetary Policy Statement.

“The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame,” the central bank added.

As a result, mortgage interest rates are now rising rapidly. In June 2022, the average interest rate on mortgages increased to 5.5%, from 4.5% in the previous month and just 1.75% a year earlier.

Mortgage loans continue to fall

In May 2022, the total amount of residential mortgage loans outstanding slightly by 1.6% to ISK 539.66 billion (US$3.99 billion) from a year earlier, following a 9.3% fall in May 2021, according to figures from the Central Bank of Iceland.

Iceland residential mortgage loans

As a percent of GDP, the size of the mortgage market shrunk to 16.2% in 2021, down from 19.3% in 2020 and 22.8% in 2017, based on estimates by the Global Property Guide.

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 weakens against the US dollar but strengthens against the euro

In June 2022, the Icelandic krona depreciated against the US dollar by 7% from a year earlier, reaching a monthly average exchange rate of ISK 131.08 = USD 1. This was after krona lost 5.1% of its value against the US dollar during the onset of the pandemic from January 2020 to December 2021.

Iceland exchange rate

In contrast, the krona actually gained 6% y-o-y against the euro, with the exchange rate at ISK 138.47 = EUR 1 in June 2022. This partly offsets the 6.8% decrease in the value of the krona against the euro during the pandemic.

During the global financial crisis, the value of the krona plunged from ISK62.33 = US$1 in December 2007 to about ISK123.73 = US$1 in 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. However, these gains were partly reversed again from April 2018 to December 2019, when the value of the krona depreciated by 18.3% against the US dollar and by 9.8% against the euro.

Tourism is gradually recovering

More than two years after the Covid-19 pandemic broke out, tourism in Iceland is now gradually recovering. In the first five months of 2022, there were about 459,480 stay-over tourist arrivals in the country, a sharp improvement from just 32,140 arrivals in Jan-May 2021 but still almost 35% below the 704,851 arrivals recorded in the same period three years ago before the pandemic.

Iceland tourist

This is buoyed by the return of British and American tourists. In the first five months of 2022, visitors from the UK accounted for about 21.4% of the total arrivals, followed by the US (18.5% share), Germany (7% share), Poland (6.3% share), and France (5.9% share).

“The initial impact of the war in Ukraine appears to be relatively mild and prospects for tourism recovery over the summer appeared very encouraging,” said the IMF in its June 2022 Consultation report.

Tourism was almost nonexistent in the past two years, with visitor arrivals plunging to 486,308 in 2020 and 698,181 in 2021 – far lower than the annual average of 2.1 million arrivals in 2016-2019.

Yet 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. 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 export revenues.

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.

Iceland gdp inflation

“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.

Iceland unemployment

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.