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Housing market cooling apace

The housing market has turned a corner and has begun to cool quickly. The number of homes advertised for sale is rising rapidly, most of them properties up for resale rather than new construction. This indicates that policy actions taken by the Central Bank (CBI) are getting the intended results.

As is well known, the housing market has been buoyant in the recent term. Prices started rising virtually as soon as the pandemic struck in 2020. The pace accelerated a year later and has remained brisk ever since. Now the market has begun to shift gears. House price inflation is finally losing steam, and relatively quickly, at that.

The first signs of a downturn in the housing market came in July, when the house price index rose by only a percentage point month-on-month. In a “normal” environment, a one-point MoM increase would be considered large, but in this case it was like a breath of fresh air after several months of 2-3% rises. The turnaround became clearer in August, when the house price index fell by 0.4% – the first MoM drop since November 2019. The decline was driven by a 2.4% slide in single-family home prices, as condominium prices stood all but still during the month. Single-family home prices are generally more volatile than condominium prices, as data for each period are backed by fewer purchase agreements.

Now – finally – house price inflation is losing steam. Capital area house prices have risen by 23% over the past twelve months, down from the August figure of 25.5%, the fastest pace since year-end 2005. Condominium prices in greater Reykjavík have risen 24% in the past year and single-family home prices by 20%.

Central Bank finally manages to pour oil on the waters

The number of homes for sale has risen rapidly in the recent past, which is consistent with other signs of cooling. According to the Housing and Construction Authority, about 1,000 properties were for sale in greater Reykjavík in September, the largest number since the beginning of 2021. This accords well with our own housing supply data. Property listings have continued to increase rapidly in number, to 1,400 in greater Reykjavík at the beginning of October.

Some 300 of these are newly constructed, whereas most properties on the market are older homes being re-sold. As we see it, this is a clear indication that the market is calming down not because of an increase in new housing supply but because of a downturn in demand. The main reason for the shift appears to be the policy action taken by the CBI, which has raised interest rates steeply and tightened borrowing requirements on new mortgages. So it can be said that the CBI has finally managed to pour oil on the waters of a turbulent housing market. It began raising rates and tightening lending requirements in spring 2021 in a bid to soothe the market, as house prices have been a major contributor to stubborn inflation in the recent term.

Calmer housing market in 2023

Demand pressures are still strong in the property market, although they have started to ease. The average time-to-sale is still very short, and a goodly share of homes still sell at a premium on the asking price. But if the market is to rebalance, the supply of new properties needs to pick up. A tally published earlier this week by the Housing and Construction Authority and the Federation of Icelandic Industries indicates that just over 1,200 newly built homes will be put on the market this year, followed by another 3,200 in 2023. Hopefully, this will be enough to satisfy pent-up demand and increased need due to demographic developments.

According to our new macroeconomic forecast, we expect house prices to cool quickly in coming months, and we hope the market will be reasonably balanced by early 2023. For this year, we project that real prices will rise by nearly 12%, most of which has already materialised. In 2023 we expect real prices to rise year-on-year by just under 1% and nominal prices by an average of 7%. It should be borne in mind that in a comparison of annual averages, the increase that has already materialised in 2022 shows as a steep jump YoY, even though prices are set to rise much more slowly in coming quarters. We expect the housing market to sail in relatively calm waters in 2023. Prices could fluctuate, however, and perhaps even fall in the short run, but over the long term they will move in line with the general price level, according to our forecast.


Bergthora Baldursdottir