According to figures from Registers Iceland, capital area house prices rose by about 1.6% month-on-month in March, the largest MoM rise since spring 2017. Twelve-month house price inflation in the region now measures 8.9%, up from 7.3% in February. Detached housing prices have risen most in the past year, or by 9.9%, while condominium prices have risen 8.0%. Since mid-2020, twelve-month house price inflation has steadily gained momentum, even while the coronavirus has been besieging the country.
Capital area real estate market heating up
Newly released figures from Registers Iceland indicate that the capital area housing market is in full swing. Demand is brisk, and low mortgage lending rates appear to carry more weight than the Corona Crisis. Price increases are still modest and have generally kept pace with real wages and the general price level. On the other hand, a substantial increase in supply is needed soon in order to balance supply and demand and reduce the risk of excessive price hikes further ahead.
Measured in terms of the house price index and the CPI, real house prices in greater Reykjavík have risen 4.6% in the past year. The market is lively at present, and favourable mortgage rates appear to have far more impact on market activity than the fact that we are in the midst of a major economic crisis. That said, it must be borne in mind that the Corona Crisis affects different households to varying degrees. Real wages have generally risen, and most households are financially strong. As a result, households that have not suffered job losses or severe losses in business revenues tend to be well positioned. If house prices continue to climb and our forecast of declining inflation materialises, real house prices will rise significantly in the coming term.
As is mentioned above, single-family homes have risen more in price than condominiums have. As the chart below shows, single-family home prices overtook condominium prices in Q4/2020. The trend continued in Q1/2021, with detached house prices rising 8.0% and condominium prices by 7.4%. Demand for detached housing appears to be gaining steam, and apparently, buyers are increasingly taking advantage of favourable lending rates and moving to a larger home. Another factor in this may be the widespread pandemic-induced shift towards remote working, which in many cases increases the need for workspace at home.
Brisk demand for housing
Since mortgage lending rates began to fall, demand for housing has soared, as can be seen in turnover figures. In greater Reykjavík, residential housing market turnover increased nearly 70% year-on-year in Q1/2021. It began to rise around mid-2020, in tandem with house prices themselves, then peaked in Q4 and has tapered off since. A total of 1,050 purchase contracts were registered in March 2021, the largest single-month total since June 2007. But these have followed the same pattern as turnover has, peaking in Q4/2020 and then easing somewhat in Q1/2021.
While demand has increased, the supply of available housing has contracted sharply, according to Central Bank (CBI) data on capital area property advertised for sale. In February, for instance, an average of 840 properties were listed for sale, down from 1,460 a year earlier. This represents a contraction of 43% in a single year, and the decline is spread more or less equally between condominium housing and single-family homes. The number of homes for sale in February is close to the spring 2017 trough of 800. At that time, house prices were rising considerably more than they are now; in fact, twelve-month house price inflation peaked at 23.5% around mid-2017.
A short average time-to-sale goes hand-in-hand with this surge in demand, and now, the average selling time has fallen to its shortest since measurements were introduced. In January and February, it was one month, down from an average of two months in 2020. In such an environment, it comes as no surprise that the number of flats selling at a premium on the asking price has increased in recent months. According to the Housing and Construction Authority, an all-time record 30% of properties sold at a premium in February, and detached homes did so more often than condominiums did.
House prices still rising modestly
The housing market has been full of surprises since the Corona Crisis hit. Prices continue to rise, and market turnover is brisk. It is beyond doubt that the decline in the policy interest rate has made a major impact on the market, lowering debt service on new mortgages and boosting homebuyers’ purchasing power.
But what is noteworthy is that price increases have not gotten out of hand, as they last did in 2017. Prices are still rising in line with real wages and the general price level. All that said, supply must keep pace with demand in the long run if outsized demand pressures are to be avoided. According to the tally conducted by the Federation of Icelandic Industries, a record number of new flats were put on the market in 2020, but new construction has declined sharply since then. There appears to be a distinct shortage of single-family homes at the moment, as few of them have been put on the market and demand is quite strong.
The near-term outlook is for a limited supply of new homes coupled with historically low lending rates. We expect house prices to continue rising moderately in excess of the general price level in the coming term.