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Updated inflation forecast: Housing market cooling rapidly

In response to new house price index data, we have updated our inflation forecast for September. The outlook is for inflation to fall faster than previously assumed, as the housing market has begun to cool quite quickly.

Capital area house prices fell by 0.4% month-on-month in August, according to new data from Registers Iceland and the Housing and Construction Authority, the first decline in the index since November 2019. The fall in the index is due to a 2.4% MoM drop in single-family home prices, whereas condominium prices rose by 0.1% over the same period.

Single-family home prices rose by 3.7% in August and have now fallen by 2.4%. They are generally more volatile than condominium prices, as data for each period are backed by fewer purchase agreements. Even so, it is clear that the housing market is cooling apace, and more rapidly than we had anticipated.

Updated inflation forecast

Because of this, we have updated the inflation forecast we published last week. In that forecast, we had projected that imputed rent (largely a reflection of house prices) would rise by 0.6% MoM in September. In view of the new house price index data, we now think it likelier that imputed rent will remain flat in September. The measurements from Statistics Iceland (SI), on the one hand, and Registers Iceland (RI), on the other, are similar in that both are based on a three-month moving average, but imputed rent is measured nationwide, while RI’s house price index is limited to the capital area.

This change in imputed rent will cause the CPI to rise by 0.2% MoM, lowering headline inflation to 9.4%, if our forecast materialises. We have also updated our short-term forecast, as the outlook is for inflation to taper off slightly faster than we previously projected. Our short-term forecast indicates that the CPI will rise by 0.2% in October, 0.1% in November, and 0.4% in December, and that headline inflation will measure 8.7% in December.

This also affects our long-term forecast to a degree. We now forecast that inflation will average 8.1% in 2022, 6.3% in 2023, and 3.9% in 2024. Other items in last week’s inflation forecast are unchanged.

In our estimation, this index measurement confirms the swift cooling of the housing market in recent months. It will be very interesting to see how the market develops in the near future. At all events, it is quite clear that actions taken by the Central Bank, which started raising interest rates in May 2021, are finally beginning to bite.


Bergthora Baldursdóttir




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