House prices in greater Reykjavík rose by 2.2% month-on-month in June. Although the increase is quite a large one, it is the smallest MoM rise since this January. Single-family home prices in particular appear to have turned aside from their recent path, rising by 0.8% MoM, as compared with 2.2% for condominium housing.
House prices still rising rapidly, but signs of a turning point are emerging
Even though house prices in greater Reykjavík rose by over 2% last month, there are signs that the market gradually rebalancing after the past several quarters’ limited supply and buoyant demand. Growing supply of new flats, more stringent lending requirements, higher mortgage interest rates, and bleaker consumer expectations about the economy are among the explanations for the shift.
In the greater Reykjavík area, house prices have risen 25% in the past 12 months, the fastest year-on-year increase since the beginning of 2006. Single-family homes, up 24.5%, have risen about as much in price as condominiums have (25.1%).
Is the market gradually rebalancing?
Housing market activity picked up somewhat this spring after a relatively calm first four months of 2022 relative to the period beforehand. In May, 667 purchase agreements were registered in the capital area, including 524 condominiums and 76 single-family homes. This represented an increase of one-third MoM but a drop of a fourth relative to May 2021. Housing market turnover data for June are not yet available.
Other formal and informal indicators of developments in the housing market suggests that it may be cooling somewhat and moving towards a better balance. In the Housing and Construction Authority’s (HMS) monthly report, which describes the most recent market trends, it is pointed out that the number of homes for sale in the capital area rose from 503 at the beginning of May to 733 by the beginning of July. While the latter figure is low in historical context, it represents a 46% increase in the span of two months. The rise in available properties does not stem from new construction, either, but from existing homes put on the market. Furthermore, the share of flats selling at a premium on the asking price declined MoM in May, after having hit an all-time high earlier in the year. The same can be said of the average time-to-sale in greater Reykjavík, according to the HMS report.
The Central Bank’s (CBI) 4 percentage point interest rate hike over the past year – a bid to lean against rising inflation, a large share of which is due to house prices – has led to a corresponding rise in banks’ and pension funds’ non-indexed mortgage lending rates. Over the same period, the CBI’s Financial Stability Committee has somewhat tightened its rules capping loan-to-value ratios and debt service-to-income ratios on new mortgages. It is possible that the CBI’s various policy actions have finally begun to bite on the demand side of the market, which has seemed virtually immune to monetary tightening until now.
Widespread surge in real house prices
The recent house price inflation episode is not a uniquely Icelandic phenomenon; in fact, similar trends have been seen in much of the developed world. According to CBI data, real house prices in the US rose by 23% from Q4/2019 through Q1/2022. Over this same period, they rose by 22% in Sweden, 14% in Norway, 13% in the UK, and 17% in Iceland. What has set Iceland apart in recent months is the persistence of the surge in real house prices, while markets in many neighbouring countries have showed signs of calming down.
A better balanced market is in the offing
As we noted in our macroeconomic forecast from May, we believe conditions are in place for a continued swift rise in house prices in the months to come. But hopefully – and presumably – growing supply and declining demand will take the starch out of house price inflation as the year comes to a close. In this context, it is worth noting that according to HMS, price-adjusted construction market turnover is stronger than it has been in years, as is the number of people employed in the construction sector. This gives cause for hope that the housing supply will grow in coming months.
In our macroeconomic forecast, we projected that house price inflation would measure just over 22% this year but then lose considerable momentum over the course of the coming winter. By mid-2023, the market should have settled down, with modest price hikes and a better balance between supply and demand. We remain optimistic that this forecast will be borne out.
