House prices fell by 0.4% month-on-month in May, according to data from the Housing, Construction, and Planning Authority (HMS). This is the first decline of the year, as prices have either risen or held steady until now. The drop is due mainly to detached housing in the capital area, which fell in price by 2.9% MoM. Condominium prices in greater Reykjavík rose by 0.3% over the same period, and prices in regional Iceland were up between months as well. Single-family home prices generally fluctuate more than condominium prices do, as there are fewer purchase transactions underlying the calculations.
Real house prices continue to fall
The housing market has cooled significantly, and real prices have been falling since last August. The temperature has not hit absolute zero, however, and properties are still changing hands. In a sense, the housing market can be divided into two segments: new builds and pre-existing properties. The period ahead looks set to be tranquil, and we expect real prices to keep falling this year.
In the past twelve months, home prices have risen by 2.2% nationwide. In greater Reykjavík, the price of both detached housing and condominiums has risen by 2.5% over the same period. In regional Iceland, detached housing prices are up 2%, while condominium prices have fallen by 0.3%. Even though nominal prices have risen, real house prices have fallen since August 2025. Real prices last declined in 2023, when high interest rates threw ice water on an overheated market. But demand surged again soon thereafter, owing to the so-called Grindavík effect. The current situation is vastly different, and price pressures in the market have eased again.
Rent continues to rise
The HMS has also published data on the rent price index, showing that capital area rent prices rose 0.4% MoM in May – the fourth consecutive monthly increase. Rent has risen faster than house prices recently, but twelve-month rent price inflation has subsided and is now 4.9%. Furthermore, Statistics Iceland’s (SI) last two measurements show that imputed rent, which is based on developments in rent prices, has started to pick up again. The increase year-to-date is 2.2%, but this is well below the rise in the rent price index.
Housing market activity subsides
Housing market activity has shrunk in terms of turnover and purchase transaction numbers. In the first four months of this year, the number of purchase agreements was down 12% relative to the same period in 2025, but considerably above the 4m/2023 total. As can be seen in the chart below, however, the comparison with 2024 is distorted by the very strong Grindavík effect at that time. Turnover in 4m/2026 was down 11% YoY but still averaged ISK 62bn per month, suggesting that the housing market is still alive and kicking despite the recent slowdown.
Bifurcated market?
The supply of homes on the market has continued to grow, to over 6,000 in April, according to data from the Central Bank (CBI). This is Iceland’s largest stock of available housing since 2017, when data collection began. Newly built properties now account for about 40% of the total supply, yet only 19% of purchase agreements are for new builds. It therefore comes as no surprise that selling times are still much longer for new builds than for older properties. For newly built properties, selling times as expressed in months of inventory (MOI) average about 14 months, twice as long as for pre-existing homes.
Thus the market can be split into two parts: the market for new builds and the market for pre-existing properties. There is still demand for pre-existing properties, and sales seem to be moving along, although the pace has slowed in the recent term.
Watershed in the housing market
In our most recent macroeconomic forecast, we project that nominal house prices will rise each year of the forecast horizon, while real prices will fall in 2026 and taper slightly in 2027. We forecast a nominal price rise of 3.3% in 2026 and 4.1% in 2027. High interest rates, stringent borrower-based measures, and changes in access to credit will keep demand under wraps in the coming term, causing the need for housing to accumulate.
Even so, a number of factors will support demand in the near future. Chief among them are households’ sizeable accumulated savings, continued real wage growth, and households’ strong position overall. Furthermore, the rules on HMS equity loans have been eased and the maximum loan-to-value (LTV) ratio has been increased to 90% for first-time buyers, which has facilitated their access to the market and will continue to do so. Thus the outlook is for the market to be serene but not sclerotic in the period ahead.
We expect demand to start picking up over the course of 2027, in tandem with the resumption of interest rate cuts. In 2028, the final year of the horizon, we expect house prices to rise the most, or about 6.5%, fuelled primarily by stronger economic activity, reduced inflation, and lower interest rates. Nevertheless, it will be important to manage the housing supply effectively and ensure that it keeps pace with underlying demand, so that price increases do not exceed our forecast.
We also project that rent price hikes will keep tapering in the coming term. That said, there is some uncertainty about the impact of statutory amendments that entered into force at the turn of the year, as they could push rent prices temporarily higher. Perhaps we have already begun to see the effects in the rental market. The housing market situation will be important in this context: if demand remains under control in the longer term, prospective buyers could turn to the rental market in greater numbers. Our forecast assumes that rent prices will rise modestly as the housing market activity picks up. This is important for the inflation outlook, as SI uses the rental equivalence method to estimate housing costs when compiling the CPI.
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