House Prices Remain Under Pressure

Iceland’s housing market continues to move sideways, with high financing costs weighing more heavily on demand than property valuations themselves.

The national housing price index rose just 0.09% in June, following a 0.44% decline in May and no change in April. Prices were up 1.8% year-on-year, but with inflation running above 5%, housing values continued to decline in real terms.

Regional performance was mixed. Prices rose 0.43% outside the capital area but slipped 0.09% in the capital region. Detached homes performed better, while apartment prices declined in both areas.

Supply also remains elevated. Around 5,790 homes were under construction nationwide, with a further 801 permitted but not yet started. However, construction activity is slowing as employment weakens, insolvencies rise and fewer new companies enter the sector. 

Inflation and Borrowing Costs Remain the Main Constraint

Inflation increased to 5.3% in July, marking a third consecutive monthly rise.

The policy rate stood at 7.75% after increases in March and May, while the attached market outlook expected another rise to 8.0% in August.

Despite weaker house-price growth, affordability has improved relative to wages. House prices have fallen against wage growth since 2022, bringing the price-to-wage ratio close to its ten-year average.

However, mortgage servicing costs remain around 30% to 40% higher than before the pandemic, keeping borrowing conditions restrictive.

Outlook

Iceland’s housing market is likely to remain subdued while interest rates stay elevated.

The outlook expects rates to remain around 8.0% into next year before beginning to ease by the end of the first quarter of 2027.

If borrowing costs decline while the construction pipeline continues to shrink, tighter supply could create the conditions for renewed house-price growth.

The contents of this article were contributed by Ásdís Ósk Valsdóttir, Head of IQI Iceland.