Single-family homes in greater Reykjavík the main catalyst

Single-family home prices in greater Reykjavík fell the most – 2.1% – and were the main driver of the overall decline in May. Condominium prices in greater Reykjavík fell also, but by far less, or 0.3%. Detached homes prices in the capital area have fluctuated widely, probably because there are fewer transactions underlying each month’s measurements. On the other hand, prices in regional Iceland rose in May: detached housing by 1.3% and condominium prices by 1.2%.

YoY house price inflation loses steam

The YoY rise in home prices has decelerated in recent months and is now down to 5.7% nationwide. In the past year, prices in regional Iceland have risen by 9.1% and prices in greater Reykjavík by 4.6%. As these figures show, prices in regional Iceland have risen nearly twice as fast as those in the capital area. The increase has been largest for condominium housing in regional Iceland, at 11.5%. In all likelihood, YoY house price inflation will keep easing in coming months as large monthly increases from last summer drop out of twelve-month measurements.

Housing market activity down between years

In the first five months of 2025, housing market activity was weaker than over the same period in 2024 but stronger than in 5m/2023. It is difficult to compare market data against 2024, when activity was unusually brisk because of what we call the Grindavík effect, with each month’s turnover smashing the record set in the month beforehand. In the first five months of 2025, turnover has averaged ISK 71bn per month in a total of roughly 910 registered purchase transactions. Over the same period in 2023, however, turnover totalled ISK 44bn and 670 contracts were registered. As this indicates, there is still demand in the market, even though it has subsided markedly since last year.

In the past few quarters, however, the market has changed because of a surge in the supply of homes for sale. According to data from the Central Bank (CBI), there were 4,400 homes on the market in April, the largest number since 2017. New builds account for a sizeable share of homes for sale, currently 36%. That percentage is even higher in the capital area, where our measurements indicate that 53% of all properties on the market are new builds. The surge in housing supply has caused the average time-to-sale to lengthen considerably, to 4.5 months in April, according to CBI data. For new builds, however, the selling time is far longer, averaging more than a year.

Housing market equilibrium ahead?

The balance between supply and demand for housing appears to be healthier than in recent years, and we expect the market to be relatively tranquil in the coming term. Factors dampening demand include slower population growth than in recent years, high mortgage lending rates, and tight borrowing requirements. On the other hand, households’ increased accumulated savings will spur demand, as will real wage growth.

As is noted above, the MoM drop in house prices was driven by fluctuations in single-family home prices. It is not unlikely that we will see occasional monthly price drops in the period ahead, although in the long run we expect prices to keep rising, albeit at a slower pace than in the recent past.

In our most recent macroeconomic forecast, we projected year-on-year house price inflation at 6.2% in 2025. The market looks set to hold broadly unchanged in 2026, with prices rising 5.3% YoY. The change over the two years is similar, but because the measure is between annual averages, the difference between 2025 and 2026 projections totals 0.9 percentage points. As the forecast horizon advances, we expect lower inflation and interest rates to stimulate demand, pushing house prices up 6.4% YoY in 2027. If the forecast holds, real price hikes will be fairly modest, especially in comparison with recent years.