Although rent prices are still rising, the pace of the increase has changed radically. In 2023 and 2024, rent hikes far outpaced both the CPI and the wage index, even though wages had surged and demand pressures in the housing market had bounced back due to the Grindavík effect. This shows just how tight the rental market was at that time.

Since mid-2025, however, the situation has flipped on its head: rent prices have risen more slowly than wages and have broadly kept pace with inflation. Over a longer period, rent has risen more rapidly than the wages of lower-income groups: from 2014 through 2024, rent rose 122% and the lowest wages by 89%. Put differently, the rental market has cooled off after its previous hot spell. It should be borne in mind, though, that even though movements in rent prices have shifted, the rent price index has risen faster than house prices in the past three years.

Slower rise in number of new leases

In the first six months of 2026, the number of leases on the register rose by nearly 1,250, compared to an increase of almost 3,100 over the same period in 2025. The slowdown is due almost entirely to a decline in leasing company contracts, as leases between individuals were broadly unchanged. In fact, new lease registrations between individuals have increased between years each month thus far in 2026, but this is not new: they have been doing so virtually uninterrupted for over two years. On the other hand, deregistrations by individuals have increased faster than new registrations, as individuals’ flats are often rented out only temporarily. This explains why the net increase in individual leases has been smaller this year than in 2025. The net increase in the market is still mostly among individuals, while this year’s slower growth in overall lease numbers is due to leasing companies.

This more sluggish pace can be seen in each month of H1/2026, as the net increase has been smaller than in the same month of 2025. The month of May stands out, however, with more than twice as many lease expiries than in April. In most cases, this was due to leases on student housing, which generally expire at that time of year. Even after adjusting for seasonality, there were 22% more deregistrations in May 2026 than in May 2025. The trend continued in June, when the net increase was 33% smaller than in 2025, but the underlying drivers differed: new registrations were virtually unchanged YoY, while deregistrations were up 16%.

The slower increase stems mainly from the fact that more leases expired than in 2025, and to a lesser degree, from a more modest increase in the number of new leases. It is interesting to note that in HMS’ opinion, new registrations have not increased excessively since the registration requirement took effect at the turn of the year, contrary to the purpose of the requirement. This is because the register of leases still only covers about 30,000 of an estimated 50,000 households in the rental market. For instance, rentals between friends and relatives, or rentals of single rooms, are probably not entered to the register.

The slowdown in demand is due to weaker population growth, among other things. Iceland’s population increased by 5,080 in 2025. This is about a fifth below the average for the past ten years and far below the 2022 record of more than 10,000. In the greater Reykjavík area, immigration of foreign nationals, a larger share of whom are in the rental market, has slowed markedly over this period, although the timing of this shift does not suggest it directly explains the fluctuations in rental demand: rent prices continued to rise sharply well after immigration had already begun to ease, and in Q1/2026 immigration of foreign nationals was in fact somewhat higher than a year earlier.

The share of first-time homebuyers has been unusually high recently, reaching nearly 40% in April, one of the highest levels since 2007. But for first six months of the year it was just over 36%. Even though the share of first-time buyers has remained high in a cooling housing market, it was quite a bit smaller than at the same time in 2025. The relaxation of borrower-based measures helps to explain the rise in the share of first-time buyers. The maximum loan-to-value ratio was raised to 90% in late 2025, and more buyers were able to obtain HMS equity loans, even though the HMS reported that in June, demand for the loans exceeded the amount available for allocation for the fourth month running. This shows that although the share of first-time buyers is higher, it does not represent an actual increase, as the chart below illustrates. That said, there are no clear signs as yet that renters are shifting towards home ownership, as the number of first-time buyers has declined just over 9% YoY, even though the number of other buyers has fallen more.

Imputed rent holds its ground

Rent prices are still rising, but at a reduced pace due to the downturn in demand in the rental market. The rise in imputed rent has eased far more slowly, however, and therefore does not follow the same pattern. It is important to remember the difference between the rent price index, which measures prices according to new rental leases, and imputed rent, which SI uses to estimate owner-occupied housing costs for compilation of the CPI. In June 2024, SI began calculating imputed rent using a new method. Previously, it was calculated using the simple user cost method, which was based on property prices and real interest rates, among other factors, but now it is estimated based on the rent that owners would have had to pay if they leased their homes in the rental market. Imputed rent is therefore based on both existing leases and new ones. Because of this, imputed rent should adhere more closely general developments in the rental market, and it should be less susceptible to short-term financial market volatility.

From the time SI changed its imputed rent calculation method through June 2026, the rent price index has risen by 11.8% and imputed rent by 13.8%. Last winter, the two indices began to diverge when the rent price index declined and imputed rent continued to rise. For instance, the YoY change in imputed rent has been larger than the YoY change in the rent price index ever since last October.

One possible explanation for the difference lies in the fact that some of the leases used to calculate imputed rent are price-indexed. According to SI, about 45% of the leases used to calculate imputed rent were indexed as of mid-2025, most of them indexed to the CPI. Information from SI suggests that this percentage is now broadly the same as it was a year ago, although it has fluctuated in the interim.

The stock of indexed leases therefore continues to rise in line with the CPI, even though rent hikes may be slower in the new leases on which the rent price index is based. The rent price index is more volatile than imputed rent; therefore, a three-month moving average of the index is used to isolate underlying trends from short-term swings. In addition, it can be seen that when the rise in rent prices slows over the winter, imputed rent continues to climb steadily. In our opinion, persistent inflation has buttressed the rise in imputed rent, which explains in part why rent hikes have slowed and imputed rent increases have not. This shows that there is a spiral at work, where past inflation affects new inflation measurements through the above-described imputed rent calculation. In our assessment, this is hardly a favourable situation.

Turnaround in the offing

It is possible to put these developments into context by comparing rent prices and house prices. Over the past 15 years, house prices have risen by 271% and rent by 213%. The ratio of rent to house prices has therefore fallen from an index value of 100 at the start of 2011 to just over 84; i.e., by 16%. It has not changed at a constant rate over this period, however. In the wake of the pandemic, when interest rates were low and demand for purchased housing skyrocketed, the ratio tumbled, bottoming out at just over 70 in mid-2022. Thereafter, it started climbing again as interest rates rose and purchasing power fell, and it has risen fairly steadily since then.

In our macroeconomic forecast, we assume that this trend will gradually reverse. Rent is expected to rise slightly faster than house prices through 2027, but in 2028 housing market activity looks set to pick up and house prices to increase much more rapidly than rent, or about 6.5% that year. At that point, the ratio will finally start to fall, reaching about 81 at the end of the forecast horizon. This would represent a gentle adjustment rather than an abrupt correction, as it would be far more gradual than the preceding surge, as the chart shows.

The effects of regulatory amendments that entered into force at the beginning of 2026 are uncertain, but rent prices do not seem to have jumped around that time. Nevertheless, this matters for the inflation outlook, as rental equivalence is among the factors SI uses to estimate housing costs in the CPI. Although we expect inflation to pick up slightly in the latter part of 2026, the slower rise in rent should contribute to disinflation later on, all else being equal.