Hous­ing mar­ket at a cross­roads: what’s next?

Arion Bank presented a new report on the housing market last week. The report reviews trends in the market and the key driving forces that have had the greatest impact for the past years. It also looks ahead, and discusses potential factors that may influence the market going forward, in addition to providing a price forecast and different scenarios. In short, the housing market is currently relatively subdued, as interest rates have been high over the past three years, household financial conditions have tightened, and population growth has slowed. Property sales are progressing slowly, particularly sales of newly built homes, and inventories of unsold properties are building up.

There is a risk that residential construction will slow, as it is difficult to finance further development at the current interest rate level unless capital can be released through the sale of completed properties. Despite this, the real price increases seen during the pandemic period have only reversed to a limited extent, contrary to forecasts and prevailing economic conditions.

Developments in the housing market depend not only on how quickly inventories of new homes are absorbed, but also on reduced incentives to rent out residential properties, tighter access to indexed loans, increased oversight of the short‑term rental market, migration trends, the return of normal life to Grindavík, interest rate developments, and potential accession to the European Union - these being among the factors addressed in the report.

Despite the various challenges, modest increases in residential property prices are expected in the coming years; however, real prices are projected to continue to ease slightly through the latter half of next year