Capital area house prices fell by 0.7% MoM in December, according to data published yesterday by the Housing and Construction Authority (HMS). This is the second month in a row to see a MoM drop in the index, following on from a decline of 0.3% in November.
House prices ease for the second month in a row
The capital area house price index fell in December, its second consecutive decline. Both detached and condominium housing declined in price month-on-month. Most data suggest that the housing market is cooling apace, which augurs well for the inflation outlook, among other things.
Condominium prices in greater Reykjavík fell by 0.3% MoM, the biggest drop in this housing category since June 2020. Single-family home prices fell far more, or by 2.1% MoM. In the past three months, the price of single-family homes has fallen by a combined 4%, after jumping 4.8% in September.
The year-on-year rise in capital area house prices overall has now lost pace five months in a row. The increase for 2022 as a whole was 17.4%, down from the peak YoY rise of 25.5%, measured in July. In December, condominium prices rose by 17.8% YoY and detached home prices by 16.7%.
Is house price volatility abating?
The housing market has been quite volatile in the recent term – single-family home prices in particular. Presumably this is due to less turnover and fewer purchase contracts in the past several months. In general, fewer single-family homes than condominiums change hands in the capital area, but the the number of detached homes sold has been unusually low in recent months. Over the past ten years, an average of 107 single-family home purchase contracts have been finalised each month. In the first eleven months of 2022, however – data for December are not yet available – the average was only 81. Single-family home prices have now fallen for the third consecutive month, after spiking in September, and it could be that the market is now correcting itself after that surge. Condominium prices, on the other hand, have been far less erratic.
Good news for the inflation outlook
These capital area house price figures give a fair indication of developments in imputed rent, which Statistics Iceland (SI) measures as part of the CPI. Inflation will probably ease in coming months, and at a fairly good clip, particularly because of this cooling of the housing market.
The data from the past few months indicate that the housing market is settling down. This lines up with our forecast and suggests that the measures put in place by the Central Bank (CBI) – interest rate hikes and tighter borrowing requirements – have helped bring about this calming. The supply of new properties on the market has increased as well, and the outlook is for strong residential investment in the coming term. We assume that the housing market will find its equilibrium in the months to come. Even so, it could be that prices will fluctuate from month to month and even continue to fall in the short run. Over the medium term, however, we expect house prices to move broadly in line with the general price level.