Capital area house prices rose by 0.7% month-on-month in May, according to house price index data published on Tuesday. by the Housing and Construction Authority (HMS). House prices as measured by the index have now risen four months in a row, after sliding for several months beforehand. Single-family home prices were the main reason for the MoM increase in May. rising by 1.9%, as compared with only 0.3% for condominium prices in the capital region.
House prices climb for the fourth consecutive month
House prices in greater Reykjavík rose month-on-month in May, driven largely by single-family home prices. Twelve-month house price inflation continues to ease, however, and is now at its lowest since October 2020. The outlook is for a tranquil housing market in the coming term.
The house price index is based on a three-month moving average; therefore, the May measurement is based on registered purchase contracts from March, April, and May. The property market was apparently quite lively in March, with a 1.5% MoM jump in prices and stronger overall activity than in either February or April.
Detached home prices rise most
Detached housing prices have risen rather quickly in the past three months, far outpacing condominium prices. In greater Reykjavík, detached home prices are up by roughly 7% over this period, while condominium prices have risen by 1.9%. For both types of property, price increases were largest in March and have lost pace since then. The HMS’ next measurement will exclude March from the three-month average, making it quite likely that the MoM rise in the house price index will lose pace as well.
Even though prices are rising from month to month, annual house price inflation continues to recede from its summer 2022 peak of 25.5%. In May, the twelve-month increase measured 6.1%, its lowest since October 2020. Single-family home prices have risen noticeably more than condominium prices, at 9.0% and 5.6%, respectively.
A healthier housing market?
Most indicators imply that the housing market is much healthier now than in recent years. One such indicator is the average time-to-sale, which has nearly doubled. According to HMS figures, property took about a month to change hands a year ago, where it now takes an average of 52 days. Furthermore, far fewer properties sell at a premium on the asking price: only 13% now, as compared with over 60% at the peak. This indicates that demand has lost considerable steam.
Moreover, the supply of housing has grown significantly in the past few months, after hitting a historical low roughly a year ago. The number of properties for sale has quadrupled in the past twelve months. Newly constructed homes account for just over 30% of this increased supply and will probably account for an even larger share in the coming term, as around 7,900 properties are currently under construction nationwide and 1,400 new homes have been put on the market year-to-date. The outlook for 2023 is for over 3,000 newly built homes to be put up for sale, which will hopefully be enough to satisfy existing demand.
Demand for housing remains keen despite high interest rates, as HMS data show. Rapid population growth is the main driver of demand at present. Iceland’s population rose by an all-time record 3% in 2022, and 2023 has seen a continuation of the trend.
In our most recent macroeconomic forecast, we project that the housing market will seek equilibrium over the next several months, with nominal house prices continuing to rise, but at a slower pace than in the recent past. We expect the housing market to be calm, owing mainly to high interest rates. According to our forecast, even though nominal prices will rise, high inflation will cause real house prices to fall marginally in 2023.