House prices pick up in the autumn chill

The autumn seems to have been a brisk one for the housing market, not least the month of September. Detached home prices continue to fluctuate, as purchase contracts are relatively few in number. No matter whether the past few months’ price hikes stem from a relaxation of terms for participating loans, from rapid population growth, or both, the market is definitely not frozen solid.


Capital area house prices rose by 0.9% month-on-month in October, according to house price index data published earlier this week by the Housing and Construction Authority (HMS). This is the third month in a row to see a rise in house prices after a decline in the months beforehand. Single-family home prices in greater Reykjavík were the main reason for the MoM increase in October, rising by 2.5%, as compared with only 0.5% for condominium housing.

Prices have bounced around somewhat since the housing market started to calm down last autumn, particularly single-family home prices. In the past two months, single-family homes have risen in price by 4%, while condominium prices have risen by less than 2% over the same period, whereas in the months beforehand, single-family home prices had fallen by nearly 4%. The most likely reason for these fluctuations in detached housing prices is the small number of contracts underlying the calculations. There were about 80 contracts for single-home purchases in October, down from the monthly average of 100 since 2018. Agreements for the purchase of flats in multi-family homes were far greater in number, however. totalling 480 in October, slightly below the average of 520 per month since 2018.

Housing market lively in autumn 2023

The residential housing market has been fairly lively this autumn, particularly in September, when home prices rose 1.4% month-on-month. Furthermore, activity was brisker in September than in both August and October, which was reminiscent of summer 2022, when house price inflation was at its most rapid. Even though prices continued to rise in October, it is positive that they are increasing more slowly, perhaps suggesting that the recent uptick was merely a temporary spike.

Participating loans: are they contributing to housing inflation?

The house price index is based on a three-month moving average, which means that the October measurement reflects purchase contracts from August, September, and October. In August, home prices started to rise again, after a slow period in the months beforehand. In our opinion, the uptick in condominium prices is probably due to the expansion of the participating loan programme early this summer. According to a press release from the Housing and Construction Authority, these changes in the programme boosted application numbers, and indeed, over half of the loans issued in 2023 were granted in Q3, after the expansion.

That said, the Housing and Construction Authority has more detailed housing market data that have not been published and are therefore not available to analysts. In the wake of discussion suggesting that participating loans may have revivified the housing market, the Housing and Construction Authority published a press release stating that the index of paired transactions does not suggest that new properties are leading house price increases – and that participating loans are not pushing prices upwards. Based on the index of paired transactions, older properties are contributing not least to the past few months’ price hikes. The paired transaction index calculates the repeat sale of single properties and does not include participating loans, which can only be used for the purchase of new homes.

The housing market has shifted gears

Twelve-month house price inflation has gained slightly in recent months and now measures 2.9%, far below the 2021-2022 level. It hardly needs repeating that house price inflation hit 25% in the summer of 2022. It can therefore be said that the housing market is far healthier today than it has been in the past two years. The year-on-year rise in condominium prices measures 3.1%, as opposed to 2.7% for detached homes.

Based on the past few months’ price hikes in the housing market, it is fairly clear, however, that housing demand is still in evidence despite high interest rates and inflation. The increase is most likely driven by rapid population growth in Iceland, although the above-described expansion of the participating loan system could also be a factor. We think the housing market will be more tranquil in the coming term, owing mainly to high interest rates and tighter lending rules imposed by the Central Bank, in tandem with growing supply.

Author


Bergthora Baldursdottir

Economist


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