An upswing in the housing market
Following are the main findings in a recently published ISB Research report on the housing market.
- We expect house prices to increase by 9.3% this year, 11.4% in 2017, and 6.6% in 2018. We also expect real house prices to increase by 7.8% this year, 9.7% in 2017, and 3.4% in 2018.
- One reason for the rise in house prices is the rapid increase in real wages. We expect real wages to rise by 10.0% this year, 5.2% in 2017, and 2.3% in 2018. Increased purchasing power will therefore create upward pressure on house prices.
- Households’ debt position has improved significantly in recent years, making it easier for them to buy a home. House purchases are 61% equity-financed, with the other 39% borrowed from credit institutions. Households’ housing equity has increased by 12 percentage points since 2012.
- Residential mortgage debt equalled 62.1% of GDP in 2015, after falling more than 20 percentage points from the post-crisis peak of 82.2% in 2010.
- Demographic developments have had a strong impact on the housing market. For example, the age distribution of the population in has changed radically in just over four decades. Age groups under age 30 have declined as a share of the total population, while over-30 age groups have increased relative to the total. Since 1970, the proportion of old-age pensioners has risen from 9% to the current all-time high of 14%.
- Just under 15% of the population are between the ages of 20 and 29, when people commonly buy their first property. Divorce rates have risen, as has the share of single people. The share of married or cohabiting couples with children has fallen by 5.3 percentage points since 1998, while the share of single individuals has risen by 2.8 percentage points.
- Statistics Iceland’s population projections suggest that demand for smaller flats will probably increase still further. In view of the developments mentioned above, the need for small flats is probably at an unprecedented high.
- The sharing economy has grown by leaps and bounds in recent years, with the surge in tourism. This has pushed house prices upwards. For example, 3,049 properties in Reykjavík were listed for rent on Airbnb in August 2016, an increase of nearly 80% since August 2015. Even though the number of Airbnb listings has risen swiftly in recent years, the occupancy rate has also soared since 2010.
- Each day in July 2016, one of every eight flats in 101Reykjavík was rented out to tourists via Airbnb. In other words, nearly 12.5% of flats in that neighbourhood were occupied by tourists.
- The housing market shows several signs of overheating at presents. The total number of flats listed for sale is at its lowest in the history of Registers Iceland data. In 2016, an average of 1,270 properties were listed for sale, a reduction of 71% since the post-crisis peak of 4,450 in March 2010.
- The average time-to-sale has been 2.13 in 2016, below that in 2007 (2.49 months). In April 2016, the average time-to-sale fell below two months (1.87 months). This has only happened twice before, in June and August 2007.
- The economy is heating up, and an increasing proportion of labour needs are met with imported workers. The increase in foreign workers stimulates demand for housing, calls for increased residential construction, and raises house prices. In 2015, more than 17,700 foreign nationals were in the Icelandic labour market, or 9.3% of the work force. We expect the share of foreign workers in Iceland to exceed its pre-crisis high this year.
- Alongside a growing population and rapidly rising house prices, residential investment has been increasing. We project that residential investment will increase by 17.7% this year, 16.0% in 2017, and 8.5% in 2018.
- About 3,000 flats are under construction in greater Reykjavík at present, and it is estimated that nearly 8,000 flats will be completed in the area during the period 20162019. This equates to an increase in supply of nearly 2,000 flats per year, on average, which is still less than the estimated accumulated need.
- The largest number of newly built flats (3,305) is expected to be in Reykjavík and the smallest in Seltjarnarnes (104). In proportional terms, the increase during the period is greatest in Mosfellsbær (25.1%) and least in Reykjavík (6.5%) and Seltjarnarnes (6.2%).
- It is noteworthy that the proportional increase over the forecast horizon is not larger in Reykjavík, as price developments in the city centrum and adjacent areas indicate that the need for new construction is greatest there.
- The projected increase in residential housing within Reykjavík is greatest in the city centrum and adjacent neighbourhoods (postal codes 101, 105, and 107), or about 8.2% over the forecast horizon. Nevertheless, this increase is more than a percentage point lower than in greater Reykjavík as a whole; therefore, the increase is more rapid in other municipalities in the capital area.
- The number of flats in the city centrum will rise proportionally the most towards the end of the forecast horizon, in 2019. Other things being equal, it is therefore safe to assume that the rise in house prices in and near downtown Reykjavík will continue to outpace that in other parts of greater Reykjavík in the immediate future.
- House prices have risen in excess of construction costs in four regions since 2010: greater Reykjavík, Northeast Iceland, South Iceland, and West Iceland. It is therefore more economical to build in these areas than it was in 2010.
- Lot prices have risen steeply, particularly in the centre of Reykjavík, where demand is greatest. Furthermore, the Federation of Icelandic Industries (SI) is of the view that there is an overall shortage of lots, which is one of the key factors in rising lot prices. Both SI and engineering firm Hannarr estimate the price of the lot at about 20% of total construction costs. As a result, rising lot prices contribute to rising total cost of newly built flats, thereby putting upward pressure on house prices.
- Communities have grown sparser in the past three decades or so, and there is now more land area per inhabitant than ever before. In 2012, there were 35 inhabitants per hectare, as opposed to 54 in 1985.
The percentage of renters was 22.2% in 2015 and has been on the decline; however, it is still relatively high in historical terms. Presumably, it has fallen further in the recent past, partly because of households’ improved position and the expectation that house prices will continue to rise.
- Lower-income households are proportionally more numerous in the rental market. Nearly half (41.1%) of those in the lowest income group are renters, as opposed to less than a tenth of those in the highest income group.
- 77% of renters and 95% of owners would choose to own a home rather than rent, provided that there were a sufficient supply of secure rental housing and homes available for purchase. Therefore, only about a fourth (23%) of those already in the rental market would choose to rent rather than own a home.
- About 90% of renters consider it uneconomical to rent a flat in Iceland at present. This suggests that the rental market consists largely of individuals who would rather own a home if they could afford to.
- House prices relative to wages, rent prices, and construction costs are not far from the respective long-term averages. This indicates that there is not a housing bubble at present. In comparison with other OECD countries, Iceland is one of few countries where prices are close to equilibrium in terms of these criteria.
- Nearly 90% of first-time buyers are between the ages of 18 and 34. The share of this age group who live in their parents’ home is currently just over 36%. This percentage has risen in recent years and is now at an all-time high. Therefore, potential first-time buyers living in their parents’ home are increasing in number in spite of their increased activity in the housing market. Presumably, the ratio of first-time buyers will rise still further in the near future.
- Prices per square metre are highest in the capital area (ISK 346,000), and house prices have risen proportionally more there than in other parts of the country in recent years.
Within the capital area, prices per square metre are highest in 101 Reykjavík (ISK 462,000) and have risen most since 2010.
- The Breiðholt neighbourhood (postal codes 109 and 111) and the Álftanes community (postal code 225) have the lowest prices per square metre in the capital area, at ISK 281,000-299,000. House prices in Álftanes have risen least since 2010, or by 13%.
- In regional Iceland, prices per square metre are highest in Northeast Iceland (ISK 222,000) and lowest in the West Fjords (ISK 90,000).
- The price per square metre of smaller flats has generally risen faster than the price of larger ones. In the capital area, flats 70 m2 in size or smaller have risen in price by 42% since 2010, as opposed to 32% for 70110 m2 flats. In greater Reykjavík as a whole, house prices have risen by 29% over the same period.
- The proportion of smaller flats in the capital area has declined from 60% to 55% since 2000 and appears likely to fall still further, given the size distribution of flats under construction. This indicates that builders are not responding to the increased need for smaller homes.
- Since 2010, house prices have risen in excess of wages by 12 percentage points in the capital area and 10 percentage points in Northeast Iceland. It can therefore be said that it is more difficult for residents of these regions to buy property now than it was in 2010.
- In all other regions, wage growth has outpaced house prices, making it easier to buy a home in those regions than it was in 2010.
- Relative to wages, flats are most expensive in the capital area and least expensive in the West Fjords. A 100 m2 flat in greater Reykjavík costs 6.9 years of wages, as opposed to 1.8 years of wages for a comparable property in the West Fjords.