The market is frosty but not frozen solid

Housing market activity has been on the decline recently. In the first eight months of 2026, the number of residential purchase agreements nationwide was down 15% YoY and turnover was down by 14%. There is still considerable activity, however, and the market can be described as chilly but not iced over.

That said, buyers’ negotiating position has grown significantly stronger. In July, about 80% of dwellings sold at below the advertised price (as compared with just under 60% in September 2024), and only 6% sold at a premium on the asking price. The median discount on properties sold at below the asking price was 3.1%. This is equivalent to ISK 2.4m, the largest median discount since September 2024, when the HMS started compiling the data. The median premium on homes selling at above the asking price was about 1.3%, or roughly ISK 1m.

The HMS reports that at the beginning of September, about 1,700 homes had been on the market longer than twelve months, including nearly 400 that had been up for sale for more than two years. In the past two years, over 85% of homes that had been on the market for more than twelve months have sold at a discount. In the HMS’ September survey, about 70% of realtors said that prices had frequently or always been reduced during the selling process.

Those who can afford to buy a home are therefore better positioned than before, with a larger selection of properties and greater scope to negotiate a lower price. It can thus be said that the housing market has shifted from being seller-friendly to being buyer-friendly.

Stock of homes for sale at a historical high

According to the Central Bank’s (CBI) Financial Stability report, nearly 6,700 properties were for sale nationwide in mid-September, the largest number since data collection began in October 2017. In July, there were an average of seven months of inventory (MOI) on the market in greater Reykjavík, up from slightly over four months a year earlier. New builds take far longer to sell, however. At the current selling pace, it would take nearly 19 months to sell all newly built homes currently on the market, as compared with around five months for resale properties.

Even so, there has been a turnaround since 2025, when the number of new builds on the market grew proportionally faster than the number of resale homes. Thus far in 2026, however, the number of new builds has increased by just under 100 and the number of resale properties by nearly 1,500. The ratio of new builds to total supply was therefore down to 35% by mid-September, from its end-2025 peak of 44%.

This shows that the cooling affects new and resale properties alike, but the market is nevertheless split into two distinct segments. On the one hand, new builds are selling slowly and the stockpile of unsold homes puts a strain on construction firms’ finances. On the other hand, the market for resale properties is much more active and trading is still brisk, although the sale process has also grown longer for these homes.

Housing market chill slows down development

Residential development has held up quite well despite high interest rates in recent years, but the HMS’ September tally shows clear signs of a contraction. According to the tally, a total of 1,855 fully finished properties owned by construction firms had not yet been brought into use, up 85% from the September 2025 total of 1,002. There were 6,216 dwellings under construction, 11% fewer than the 6,988 in the March tally. There has also been a marked decline in housing starts. Between the March and September tallies, construction had begun on 772 homes. This is 48% fewer than in the same six-month period in 2025, and the smallest total in the history of the tallies. Over a twelve-month period, however, construction had begun on 2,526 homes, or 18% fewer than in the previous year.

Furthermore, in September, 2,374 homes were at the same stage of construction as in the previous tally, up from 1,437 in the March 2026 tally and 781 in the September 2025 tally. The HMS estimates that some builders are choosing to slow down the pace of projects at certain stages so as to avoid further investment while so many properties stand empty. An unchanged stage of construction does not necessarily mean, however, that construction has been halted entirely.

This situation is reflected in the national accounts. Residential investment contracted by 8.3% in H1/2026, according to preliminary figures from Statistics Iceland (SI). Slow sales and high financing costs keep developers’ capital tied up in assets that are awaiting a buyer, thereby reducing builders’ incentive to start on new projects, all else being equal.

Further signs of cooling can be seen in the construction sector. In the first eight months of 2026, 187 construction firms were declared insolvent, about 26% of all company failures during the period, and the number of persons employed in the sector has declined YoY in recent months. The non-performing loan (NPL) ratio in the sector was just under 6% in August, although the CBI is of the opinion that the increase is due to a few isolated instances rather than to widespread arrears.

First-time buyers still holding their own

At a time when sluggish sales are straining construction company finances, the share of sales to first-time buyers has remained remarkably strong. According to the HMS, first-time buyers accounted for over 36% of purchase agreements in H1/2026. It is one of the highest percentages since 2007, apart from the period of ultra-low interest rates in 2020 and 2021. Over the period since 2007, first-time buyers have accounted for an average of 32% of all purchasers.

That said, a large market share is not in and of itself a sign of easier market access. The number of purchase contracts – 1,761 in H1/2026 – was below its ten-year average of nearly 1,900. On average, there were 294 first-time purchases per month, slightly below the ten-year average of 310. But this does not take into account that the population of Iceland has grown by over a fifth in the past ten years; therefore, on a per capita basis, the deviation would be even greater.

Contracts for sales to other buyers declined much more, or by 17% in terms of the ten-year average, as compared with 6% for sales to first-time buyers. Thus the rising share of first-time purchasers primarily reflects the even more rapid drop in the share of other buyers.

But why do first-time buyers maintain such a robust position relative to others? First of all, the regulatory framework affords them extra flexibility: the maximum loan-to-value (LTV) ratio is 90% (80% for other buyers), and the debt service-to-income (DSTI) ratio is capped at 40% (35% for others). Second, the rules on HMS equity loans were eased at the turn of the year, and demand for the loans has been strong. In the first eight months of the year, the HMS approved 240 equity loan applications, which corresponds to nearly a fourth of new builds sold during the period, up from 10% in 2021-2025. Third, first-time buyers often receive help from parents or close relatives when they buy a home. According to the HMS’ monthly surveys taken in June 2025-August 2026, an average of 79% of realtors who had sold homes to first-time buyers had seen evidence of financing assistance from family members in connection with the transactions. These factors all make it easier for first-time buyers to finance their purchases, as well as enabling them to take advantage of their stronger negotiating position in the market.

Furthermore, first-time buyers typically set their sights on smaller homes in multi-family buildings. In H1/2026, the average size of the properties they bought was 86 m2, roughly one-fourth smaller than the 116 m2 average for other buyers.

These measures, plus a strong incentive to move away from home or exit the rental market and buy their first property, could explain in part why first-time buyers have held their ground while others have shied away from the market.

Grindavík: uncertainty about near-term supply

The initial results of a revised risk assessment, published on 22 September, indicate that the conditions for permanent residence in Grindavík are acceptable, subject to certain safety requirements. The Government therefore considers it feasible to begin preparations for former Grindavík residents’ repurchase of properties in the town.

This recent development could affect the housing supply in various ways. If former Grindavík residents return to their home town in large numbers and sell the homes they have bought elsewhere, including in the capital area and South Iceland, the supply of properties for sale in those communities could increase. Furthermore, the properties owned by real estate firm Þórkatla but not resold could be put on the market or put up for rent. The scope and timing of such effects is still unclear, however.

Where is the market headed?

In our new macroeconomic forecast, we assume that nominal house prices will rise by 1.8% in 2026 and 2.8% in 2027, which equates to real declines of 3.4% and 1.6%, respectively, owing to persistent inflation. In 2028, however. the final year of the forecast horizon, we expect prices to rise by 7.5%, or 3.8% in real terms. The outlook is for market activity to be calmer well into 2027 than previously estimated, but once interest rates start to fall and mortgage lending terms to improve, the market will pick up again even more briskly.

The supply of unsold homes should keep house price inflation in check at first, though, as a large number of properties are fully finished and ready for purchase. At the same time, development is slowing. We project that residential investment will contract by 6.4% this year and then grow by 2.5% and 8.5%, respectively, in 2027 and 2028.

In the coming term, housing demand will be supported by households’ strong financial position, with modest debt, historically low arrears, and significant accumulated savings. In addition, real wages have kept growing despite persistent inflation. These demand-supporting factors are the main reason we expect house prices to rise moderately in the years ahead.