Detached housing the main driver of house price inflation

In March, house price inflation was led by detached home prices in greater Reykjavík, which rose 1.6% MoM, after a 2.3% drop in February. The price of detached housing in the capital area has fluctuated widely in recent months. Detached home prices increased in regional Iceland as well, albeit far less, or by only 0.1% MoM, and price volatility has been more muted. Condominium prices in greater Reykjavík and regional Iceland alike declined between February and March, however. In regional Iceland they were down 0.3%, and in greater Reykjavík they fell 0.2%, after increasing by 1.6% in February.

Year-on-year house price inflation has continued to lose steam and now measures 8% nationwide. Prices have risen the most in regional Iceland over the past year, or by 10.4%, while prices in greater Reykjavík are up 7.1%. Detached home prices in all parts of the country have risen faster than condominium prices in the past twelve months. In all likelihood, YoY house price inflation will keep easing in coming months as large monthly increases from last spring and summer drop out of twelve-month measurements.

Demand has subsided

Home prices have been fairly erratic from month to month since last autumn, after having climbed steadily since February 2024. The housing market was strongly affected by the volcanic eruptions on Reykjanes peninsula in 2024, and by the fact that all Grindavík residents were forced to find homes elsewhere. Naturally, demand for housing surged as a result. As the year advanced, demand tapered off and the so-called Grindavík effect all but disappeared.

Housing market activity was quite strong during that period, however, as can be seen clearly in turnover and the number of purchase contracts finalised. The market broke consecutive turnover records in March, April, and May, with the combined total for the three-month period reaching ISK 343bn. Activity started to ease in the autumn and the number of finalised contracts began to decline. The market has livened up again slightly in 2025 to date, particularly in March, when over 1,000 contracts were concluded, the largest number since August and September 2024 This indicates that some demand still exists, although it is best to avoid overinterpreting measurements from any single month.

Housing supply is up sharply

The number of homes on the market has risen steeply in the recent term. According to measurements taken by ÍSB Research, there were nearly 4,000 properties up for sale in greater Reykjavík at the beginning of April. This revitalisation of supply represents a major shift since early 2022, when the number of homes for sale was at a historical low. Growth in supply has not been uniformly smooth, however. There was a temporary dip in early 2024, reflecting the burst in demand due to the Grindavík effect, but that tapered off later in the year.

Of the 4,000 homes listed on the market at the beginning of April, nearly 2,100, or about 53%, were newly built. The share of new builds has hovered around 50% in recent months but has never risen as high as this. According to the HMS dashboard, some 6,300 dwellings are currently under construction nationwide. Roughly 60% of them are in construction stages 3-6, and the supply of newly built homes on the market is expected to hold steady over the coming term.

With the increase in supply, the average time-to-sale has grown considerably longer; in particular, it takes longer than before to sell newly built properties. According to the Central Bank’s (CBI) most recent Financial Stability report, the average time-to-sale in the market as a whole was over five months as of January 2025, an increase of two months since mid-2024. Average selling times were far longer for new builds than for previously existing properties. For pre-existing homes, the selling time lengthened from two months in mid-2024 to three-and-a-half months by February 2025. For new builds, however, the average selling time increased substantially more – from five months in spring 2024 to 14 months as of February 2025.

Is housing market equilibrium in the cards?

The outlook is for a better balance between supply and demand in the near future. We expect sales of new homes to pick up as interest rates and inflation fall in 2025, gradually giving contractors the scope to start new projects. Although there is still demand for housing, it is tempered by markedly slower population growth coupled with modest real wage gains. Unless something unexpected happens in the near future, the housing market can be expected to move towards a better equilibrium after the extremes of the past few years.