In the past twelve months, prices have risen by 2.4% nationwide. In the past year, prices have risen 2.7% in the capital area and 1.4% in regional Iceland. Condominium prices in greater Reykjavík have risen the most during the period, while condominium prices in regional Iceland have risen the least. Even though prices are up in nominal terms, they have fallen in real terms in recent months, as inflation has outpaced house price increases.

Rent prices are down

Rent prices in the capital area declined by 0.3% MoM in January. This is the second monthly decline in a row, a phenomenon last seen about a year ago. The rent price index has risen more than the house price index in the recent term. Over the past twelve months, the house price index has increased by 2.4%, while rent has risen by 5.0%, which means that rent has fallen in real terms for the first time in two-and-a-half years.

Does this mean that imputed rent will fall?

Since June 2024, when Statistics Iceland (SI) changed the methodology it uses to calculate imputed rent, it has based its imputed rent measurement on rent prices instead of house prices. This need not mean that imputed rent will fall as soon as this February, even though the rent price index has declined between months. Actually, we expect imputed rent to ease upwards in the short run. That said, the past few months’ decline in the rent price index could indicate that the rental market is cooling still further. If this trend continues in the next few months, the likelihood that the cooling of the market will deliver lower imputed rent prices will increase accordingly.

The measurements taken by the HMS and SI are not the same, although they are related to an extent. To put it simply, the rent price index is based on the average price per square metre for new rental leases in greater Reykjavík. It is published with a one-month lag. On the other hand, imputed rent is the estimated rental equivalent price of owner-occupied housing. It is based on data from all rental leases in effect during the month in question. For this reason, the rent price index fluctuates more widely, as can be seen clearly in the chart below.

Housing market activity has cooled but not hit absolute zero

Let us turn back to the housing market. Although there have been clear signs of cooling in the recent term, the housing market cannot be said to be frozen solid. Market trading is still fairly brisk – and stronger than might be expected given the circumstances at play – i.e., high interest rates and tight borrower-based measures.

In 2025, turnover in the market averaged about ISK 74bn per month. The total was lower than in 2024, when the effects of the State’s buy-up of homes in Grindavík were strongest, but even so, it exceeded the monthly averages in 2023 (ISK 54bn) and 2022 (ISK 56bn). The number of registered purchase agreements points in the same direction. In 2025, an average of 970 purchase agreements were finalised each month – fewer than in 2024 but more than in either 2023 or 2022. This is close to the ten-year average, suggesting that the market is reasonably well balanced rather than frozen.

Despite the January price hikes, market turnover and transaction numbers were well below the 2025 average. In January, turnover totalled ISK 47bn and 605 purchase agreements were registered. Such monthly figures can fluctuate, however, as January is often a sluggish month in the housing market. Examining January figures for the past few years reveals a similar pattern: transaction numbers for 2026 were down relative to 2025, but exceeded those in the years beforehand.

Tranquil housing market in the offing for 2026?

The housing market has turned a corner in the past year, finally slowing down after steep price increases in the years beforehand. House prices rose in nominal terms by 5.3% YoY in 2025, which translates to a real increase of 1.2%. In the latter half of 2025, prices started to fall, however, owing not least to the uncertainty created by the Supreme Court judgment in the so-called interest rate case.

Even though prices have picked up this January, we expect the market to be fairly tranquil this year, all else being equal. In our macroeconomic forecast from late January, we projected that house prices would rise this year by 3.8%, which would be the smallest increase since 2013. High interest rates, tight borrowing conditions, and limited access to credit have kept demand in check, and the outlook is for considerably weaker population growth than in the past few years.

Underlying demand for housing remains, however. Demographic factors, including the age distribution of the population and the need for first-time buyers to enter the market, will support demand over time. With declining inflation, lower interest rates, and a rebound in economic activity, demand will pick up again and the market will warm up as well.

In our macroeconomic forecast, we project house price inflation at 6.4% in 2027 and 7.2% in 2028. Based on our projections of inflation and house prices, real house price increases during the forecast horizon will be modest in comparison with those seen in recent years.