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Is the housing market calming down?

House prices are still rising, according to data from Registers Iceland, but at a markedly slower pace than in the recent past – perhaps a sign that the housing market is calming down. Data from the next few months will give a clearer indication of whether housing demand is easing.

Capital area house prices rose by 1.1% month-on-month in July, according to new figures from Registers Iceland (RI), bringing the rise as measured by RI data to roughly 16% year-to-date. The twelve-month rise in house prices now measures 25.5%, the strongest increase since year-end 2005. Detached housing prices rose by 3.7% MoM, while condominium prices rose only 0.5%. Twelve-month house price inflation is broadly the same for both condominiums (25.7%) and detached homes (25.3%), however. This is the second month in a row to see house prices rise more slowly than in the month beforehand, in what could be a sign that housing inflation is losing steam. The next few months will shed clearer light on the broader trend.

Real house prices – i.e., adjusted to capture changes in the general price level – have risen 14.2% year-on-year, but inflation is at fever pitch and the real increase is therefore losing momentum. This trend is likely to continue in the near future, with high inflation and a slower rise in property prices. These two variables tend to go hand-in-hand, however, as house prices are a major driver of inflation at present. As a result, inflation is likely to fall as the housing market cools – provided that other drivers of inflation behave themselves.

Various signs of a cooling housing market

Housing market activity has been a bit livelier this summer than in the months beforehand. Roughly 700 purchase agreements per month were registered in the capital area in May and June, and the number of transactions was 10% higher in Q2 than in Q1. That said, the number of transactions concluded in June was nearly a fifth lower than in the same month of 2021. No data on housing market activity in July have been published as yet.

It was generally believed that the small number of property transactions in Q1 concurrent with very steep price hikes was due to a limited supply of homes on the market. If this is indeed true, the increased number of purchase agreements concluded in the past couple of months could indicate that supply is growing. This supposition is backed by data from the Housing and Construction Authority (HMS), which show that the number of homes for sale has increased by 46% in the past two months. In addition, the share of properties selling at a premium on the asking price has fallen, and the average time-to-sale has grown longer. Although these data extend only through May, they do indicate that demand pressures in the market may be easing.

If so, it would not come as a surprise to us. The Central Bank (CBI) has been raising interest rates aggressively in the recent past. The bank’s Monetary Policy Committee (MPC) has raised the policy rate by 4 percentage points since May 2021, and to all appearances, further rate hikes are in the offing. This has pushed interest rates on non-indexed mortgages sharply higher, as the chart below illustrates. 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 appears that these measures by the CBI have finally begun to bite on the demand side of the market.

What’s next for the housing market?

As is mentioned above, house prices have risen by 25.5% YoY. They are now very high in historical terms and have deviated sharply from fundamentals. We believe the conditions are in place for prices to keep rising in the next few months, but at a significantly reduced pace. Hopefully, a boost in the supply of new properties coupled with dwindling demand will be enough to cool the market a bit as the year-end approaches.

In our macroeconomic forecast from May, we projected that house prices would rise this year by 22% nationwide, but that house price inflation would ease as the year progressed. By mid-2023, the market should have settled down, with supply and demand better in balance. We remain optimistic that this forecast will be borne out.


Bergthora Baldursdottir