Housing Market Cools Without a Sharp Correction

Iceland’s housing market continued to cool gradually in May 2026. The national housing price index declined 0.44% month-on-month to 113.3 points, although prices remained 2.16% higher year-on-year.

Affordability is improving as wages continue to rise faster than housing prices. The accompanying market data shows annual wage growth of 6.4%, compared with 2.2% growth in house prices.

Buyer activity remained subdued, with only 750 purchase contracts signed during the month, representing a 27% year-on-year decline. Rental costs in the capital area increased 4.87% annually, but remained broadly unchanged after accounting for inflation. 

Inflation Delays Interest Rate Relief

Inflation increased to 5.2% in June, remaining above the Central Bank’s 4% ceiling for a seventh consecutive month. The rise was mainly driven by a seasonal increase of more than 20% in airfares, rather than widespread price pressure.

The Central Bank maintained its policy rate at 7.75% following May’s increase, delaying expectations of near-term rate cuts. Higher financing costs may continue to limit buyer activity until inflation shows a more sustained decline.

Housing supply remains sufficient for now, with 452 new plots confirmed in the second quarter. However, only 119 were residential, while construction completions are slowing as housing investment contracts.

Outlook

Iceland’s market currently favours patient buyers who can manage higher borrowing costs.

Improving affordability and ample inventory should keep conditions buyer-friendly in the near term. However, a thinner construction pipeline may tighten supply later. Once inflation eases and interest rate cuts resume, stronger affordability and limited new housing could support renewed price growth.