Capital area house prices rose by 0.3% MoM in February, according to data from the Housing and Construction Authority (HMS), after having fallen for three months in a row. Condominium prices rose 0.4%, while detached housing prices fell by 0.2%. Detached home prices in greater Reykjavík have now fallen for five months running, and by a combined 5%, while demand for condominiums has apparently been stronger, with prices rising 0.7% over the same five-month period.
No signs of permafrost in the housing market
Capital area house prices rose month-on-month in February, after having fallen for three consecutive months. Based on these figures from the Housing and Construction Authority, the housing market is not frozen solid, even though it is quite a bit cooler than it has been in recent years. Developments in the housing market will be determined in large part by interest rates in the coming term.
Despite this MoM rise, twelve-month house price inflation continues to recede from its summer 2022 peak of 25.5%. The year-on-year increase measured 12.4% as of February, the smallest rise by this measure since the beginning of 2021. The YoY rise in condominium prices measured 13% in February, while single-family home prices were up 11.2%.
The housing market is cool, but there are no symptoms of frostbite
Even though the housing market started to calm down late last summer, market activity did not slow decisively until this year. January marked a clear shift, with reduced turnover and fewer purchase contracts than in the term beforehand. Turnover was down 39% YoY in January 2023, for example, and the number of purchase agreements down by 40%. As soon as February, market activity picked up relative to January, and turnover and contract numbers were down YoY by only 9% and 11%, respectively. Although activity has eased, these figures suggest that the market has not frozen solid; indeed, demand remains brisk.
Supply growing as demand subsides
The supply of property for sale in greater Reykjavík began to rise quickly, in tandem with the slide in demand, as the chart below shows. ÍSB Research began measuring the number of homes for sale in October 2021, when supply was at a historical low. At the trough, in February 2022, there were 460 homes on the market. By the beginning of March 2023, that total had surged to just over 2,000, the largest number since we began our measurements. It should be noted that these are unscientific measurements, and that there were probably fewer properties on the market than our figures indicate, as some homes are not removed from the listings immediately upon being sold. Nevertheless, the numbers give a reasonable indication of where the supply side of the market stands.
Newly constructed properties have constituted a growing share of homes for sale in the recent term and now account for more than a third. The outlook is for further growth in new construction in the near term. The Federation of Icelandic Industries and HMS project that some 3,200 homes will be put on the market in 2023 and 2024. Demand for housing must still be quite strong, then. Population growth hit an all-time high in 2022, and with low unemployment and a tight labour market, that growth can be expected to continue. Furthermore, the tourism industry is set for a brisk season, which generally affects the entire real estate market.
Unchanged inflation forecast
This month’s inflation figures are due for publication next Tuesday. We have forecast that house prices will continue to fall broadly as is shown in Statistics Iceland’s (SI) most recent measurements. Developments in the house price index make it more likely that prices will fall somewhat less, however, or even remain flat. HMS’ measurements have fluctuated more than SI’s have, and we therefore think this is the likeliest outcome. The difference between the two metrics is that SI measures house price movements nationwide, while HMS measures the capital area only. This uptick in March will probably cause the imputed rent component of the CPI to rise MoM instead of falling by 0.05%, as we had previously forecast, as the interest component of imputed rent pushes it upwards. Nevertheless, we see no need to change our overall inflation forecast.
Interest rates will strongly affect the market further ahead
By the end of last summer, it was clear that the Central Bank’s (CBI) policy actions – interest rate hikes and tighter borrowing requirements – had begun to bite. The turnaround occurred quickly, and the market grew erratic. For instance, capital area house prices rose by over a percentage point in July, only to retreat 0.4% in August. The house price index measurement is based on a three-month moving average, partly to mitigate price volatility, yet the fluctuations were pronounced at that time. After that abrupt reversal, house prices started to swing upwards and downwards by turns, mostly because of volatility in the price of single-family homes, which sell in smaller numbers, providing far fewer purchase agreements on which to calculate the measurements. The market was clearly calming down, and rather quickly in comparison with previous developments.
Forecasting about the housing market based on a single month’s measurement is something that should be done with great care, if at all. It is far better to examine market trends over a longer period, as month-to-month jumpiness is very common. But with that caveat, we think the figures above suggest that there is no permafrost in the domestic housing market. Demand remains, although it is less strong than before.
Interest rates will be a major determinant of future developments in the housing market. They have a strong impact on demand, and the CBI’s Monetary Policy Committee (MPC) raised the policy interest rate by another 1% yesterday morning. If credit institutions pass that rate hike on undiluted, fixed non-indexed mortgage rates can be expected to hover around and above 10% and variable non-indexed rates around 9%. It has to be considered highly probable that demand for indexed mortgages will continue to increase, which could provide only a brief respite but will lower borrowers’ debt service to begin with.
House prices will probably keep fluctuating as they have in the recent past. Based on the current outlook, we do not expect the bottom to fall out of the market, although prices could certainly fall every now and again for a single month, or even for a few months at a time. Demand is still in evidence and supply is rebounding, and the market appears considerably healthier than before. Nevertheless, interest rates are very high, and how high they ultimately climb will make a big difference in house prices in the coming term.