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Housing inflation in September driven by single-family home prices

House prices rose between August and September, owing to a significant month-on-month increase in single-family home prices. Detached home prices have been quite volatile in recent months, perhaps because unusually few purchase contracts were finalised during this period.

Capital area house prices rose by 0.8% MoM in September, according to data published yesterday by Registers Iceland and the Housing and Construction Authority. In August, prices fell marginally between months – the first decline in nearly two years — but in September they rose again. The house price index is based on a three-month moving average, which implies that August was an unusually mellow month for the housing market.

The rise in the index is due to a 4.8% MoM jump in single-family home prices, whereas condominium prices fell by 0.1% over the same period. Detached home prices are generally more volatile than condominium prices, as data for each period are backed by fewer purchase agreements. They have been quite volatile in recent months, however, as the chart below indicates.

Unusually few purchase agreements in recent months

As could be expected, fewer single-family homes than condominiums change hands in the capital area, but in recent months the number of detached homes bought and sold has been unusually low. A total of 69 purchase agreements for detached homes in greater Reykjavík were registered in August, down from 76 in July. Figures for September have not yet been released. Over the past ten years, an average of 107 single-family home purchase contracts have been finalised each month. This deviation from the ten-year average is probably the main reason this item in the index has been so volatile.

The year-on-year rise in capital area house prices has lost pace for two months running. As of September, it measures 22.5%, after peaking at 25.5% in July. The YoY rise in condominium prices measures 22.3% as of September, as compared with 23.9% for single-family homes.

Updated inflation forecast – imputed rent likely to rise

In our inflation forecast, published last week, we projected that imputed rent would fall by 0.15% in October, after remaining flat in September. In view of the new house price index data, we now think it likelier that imputed rent will rise by 0.5% in October. It should be borne in mind that Statistics Iceland (SI) measures house prices nationwide and that as a result, fluctuations will probably be less pronounced.

This change in imputed rent will cause the CPI to rise by 0.3% MoM, leaving headline inflation at 9.0%, if our forecast materialises. Our short-term forecast for other months is unchanged: we project that the CPI will rise by 0.1% in November and 0.3% in December, and then fall by 0.3% in January. If this forecast is borne out, twelve-month inflation will measure 7.7% in January.

The housing market has cooled apace in recent months, but even so, demand remains brisk. It will be very interesting to see how the market develops in the months to come. It is fairly clear that the actions taken recently by the Central Bank (CBI) – interest rate hikes and tightened lending requirements – have started to affect the market. But this most recent house price index measurement could indicate that the market for single-family homes is somewhat more sheltered from the CBI’s policy actions.


Bergthora Baldursdottir




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