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Iceland’s typically robust housing market has slowed considerably toward the end of 2012, with overall inflation-adjusted house prices in the capital and throughout the rest of the country inching downward. The country experienced some trouble along with the rest of the world during the global financial crisis from 2008-10, but bounced back in 2011 and showed little signs of slowing until recently. Now, the prices are sliding as the government looks to bail out the country’s largest mortgage lender after having come within 2.8% of pre-crisis price levels. For more on this continue reading the following article from Global Property Guide.

Iceland’s house price index rose 4.39% during the year to November 2012, according to Statistics Iceland. When adjusted for inflation, house prices dropped 0.11%. Quarter-on-quarter, house prices rose by a meager 0.28% (-1.06% inflation-adjusted) in November 2012.

During the year to November 2012:

  • Prices of single-flat houses in Reykjavik increased 3.67% (-0.8% inflation-adjusted). Multi-flat houses in the capital saw a price increase of 7.1% (2.48% inflation-adjusted).
  • Outside the capital, house prices dropped 2.09% (-6.31% inflation-adjusted), the biggest annual house price decline since February 2010.
Reykjavik Iceland
Reykjavik, Iceland by BigStock

Iceland experienced an unprecedented housing boom from Q1 2000 to Q1 2008, with property prices surging 152.9% (71% inflation-adjusted), fuelled by rapid economic growth from 2000 to 2007, when the economy expanded by an average of 4.6% annually.

However, the collapse of Iceland’s banks in 2008 saw GDP shrink by 6.8% in 2009 and by another 4% in 2010. From Q1 2008 to Q1 2010, house prices fell by 15.1%.

To save the economy and to help homeowners, Iceland’s state-controlled banks have forgiven mortgage loans for more than 25% of the population since end-2008, equivalent to about 13% of the country’s annual GDP.

The economy bounced back in 2011, with a real GDP growth rate of 3%. As the economy recovered, house prices rose again by 15.2% from Q2 2010 to Q3 2012.

The government now needs to bail out the country’s biggest mortgage lender, Housing Finance Fund (HFF). HFF, which issues mortgage loans indexed to inflation, is now struggling to repay its debts. An inflation rate exceeding 4% has put HFF at a disadvantage to rivals which provide standard mortgages. The government has already injected ISK33 billion (US$260.9 million) into HFF in new funds in 2010.

Property prices are now just 2.3% below their pre-crisis levels seen in Q1 2008. However when adjusted for inflation, property prices are still 29.4% below their peak levels.

The country’s housing market is expected to remain weak in the coming months, as the government struggles to deflate its ballooning public and external debt, which severely limits its ability to deal with future shocks.

In the third quarter of 2012, the country’s external debt stood at ISK13.14 trillion (US$103.9 billion), very large compared to Iceland’s projected GDP of around US$13.5 billion in 2012.

The economy is expected to grow by about 2% in 2012 and by 2.5% in 2013, according to Moody’s Investor Service.

This article was republished with permission from Global Property Guide.