Record­ings from the meet­ing on the hous­ing mar­ket

On Thursday, 19 March, Arion Bank hosted a meeting on the real estate market at its headquarters at Borgartún 19, under the title New Rules in the Housing Market: A Solution or a Dead End? On the same day, the Bank’s Research Department published a detailed report on its website entitled The Housing Market at a Crossroads: What Next?

The meeting was well attended and generated lively discussions on this important topic, both during the formal programme and afterwards, when guests had the opportunity to meet and enjoy light refreshments.

Discussions with a range of experts

In connection with the event, Arion Bank also produced some short videos that were shown between presentations at the meeting and can be viewed further down this page. Recordings of the presentations delivered at the meeting are also available to watch. [Videos and presentations are in Icelandic only].

The aforementioned videos contain short interviews with experts from the housing sector. Interviews were conducted with Karl Þráinsson, CEO of Arnarhvoll; Jónas Atli Gunnarsson, Economist at the Housing and Construction Authority (HMS); Björt Ólafsdóttir, Managing Director of Iða; and Guðmunda Ósk Kristjánsdóttir, Head of Real Estate and Infrastructure at Arion Bank.

The questions put to them were as follows:

• How do you assess the current state of the real estate market?

• What are the main challenges at present?

• What impact would the abolition of indexation have?

• Which measure would have the greatest positive effect?

The CEO of Arion Bank opened the meeting

Benedikt Gíslason, CEO of Arion Bank, opened the meeting by warmly welcoming guests and offering a few words on the Bank’s involvement in the housing market, the importance of the market for the economy, and the different roles played by various loan products.

An economist from Arion Bank reviewed the situation

The keynote speaker was Kári S. Friðriksson, Economist at Arion Bank, who delivered a presentation entitled “The Housing Market at a Crossroads: What Next?” The main findings from Kári’s presentation, as well as from the Arion Research report, are set out below in an accessible bullet-point format.

Deputy Governor for Financial Stability addressed borrower conditions

Following Kári’s presentation, Tómas Brynjólfsson, Deputy Governor for Financial Stability, took the podium with a short lecture entitled “Borrower Conditions: Objectives and Effectiveness.”

One of the Bank’s largest real estate projects presented

Finally, Þorgerður Arna Einarsdóttir, Managing Director of Landey, spoke about the development of Blikastaðir in a presentation entitled “Good Things Take Time.” Blikastaðir is one of Arion Bank’s largest real estate projects in the Greater Reykjavík Area and is owned by the Bank through Blikastaðaland ehf. The land is located in Mosfellsbær and involves the development of a new, large-scale residential neighbourhood with a wide range of services.

According to the planning framework, the development is expected to comprise between 3,500 and 3,700 residential units in up to three phases, including approximately 1,200 units in the first phase. There is an emphasis placed on developing an attractive and sustainable neighbourhood with strong connections to nature and the surrounding community, in cooperation with the Municipality of Mosfellsbær.

Key findings from Arion Bank’s report

Below are the main findings from Arion Research’s report, The Housing Market at a Crossroads: What Next?

• The housing market is currently subdued following three years of high interest rates, tighter household financial conditions, and slower population growth.

• High interest rates are limiting households’ purchasing power. A household with a monthly payment capacity of ISK 250,000 was able to take out an ISK 85 million loan when interest rates were at their lowest but can now only borrow around ISK 50 million due to shorter maturities on indexed loans.

• The cooling of the market is reflected more in lower transaction volumes than in price declines. Sellers appear reluctant to realise “losses”. The slowdown is therefore primarily evident in reduced turnover, which may eventually translate into nominal price decreases.

• Home sales are proceeding slowly, particularly in the case of newly built homes, which are accumulating as unsold inventory.

• There is a significant risk that residential construction will slow markedly. At current interest rate levels, it is difficult to finance further development unless capital can be released through the sale of completed properties.

• Despite the cooling of the market, the real price increases seen during the pandemic have only partially reversed — and to a much lesser extent than prevailing economic conditions would suggest.

• Non-indexed loans are the most popular option when households can afford them. Indexed loans, however, reduce volatility in debt servicing costs and make it easier for borrowers to meet lending requirements.

• The adoption of the euro could lead to lower mortgage interest rates, although rates vary widely across euro zone countries. In Iceland, they would most likely be at the higher end of the range.

• Lower interest rates would be a significant benefit for borrowers. Even if house prices were to rise in response, loan principals would amortize more quickly, resulting in faster wealth accumulation.

• More than half of tenants rent from private individuals. Measures are now being introduced to reduce incentives for individuals to hold residential property as an investment. Following the proposed tax changes, landlords may require 18–25% higher rental income to be in the same financial position as before. A reduction in the supply of rental housing could lead to higher rents, which would in turn put upward pressure on inflation.

• Developments depend on a range of factors beyond “interest rates alone”, including reduced incentives for rental investment, stricter access to indexed loans, increased oversight of short-term rentals, migration trends, the return of normal life to Grindavík, the level of interest rates, and possible EU membership (all identified as influencing factors in the report).

• Despite numerous challenges, the baseline forecast is for modest nominal price increases over the coming years, while real prices are expected to continue to edge down slightly until the latter part of next year.