Despite this MoM surge, twelve-month house price inflation continues to recede from its summer 2022 peak of 25.5%. The year-on-year increase was 10.7% in March, the smallest rise by this measure since the beginning of 2021. The YoY rise in condominium prices measured 11% during the month, while single-family home prices were up 10.6%.ði.

Housing demand still in evidence

The housing market has been volatile ever since it chilled suddenly last summer, and single-family home prices have fluctuated much more than condominium prices have. The main reason for the difference is that in general, far fewer single-family homes change hands in any given month, which means that there are fewer contracts behind the data. In February, for instance, 66 purchase contracts for detached homes were finalised in greater Reykjavík, as compared with 389 contracts for condominiums.

In the recent past, there have been unusually few detached homes sold, as can be seen in the chart below. Over the past decade, 107 detached homes have sold per month, on average, while in the past twelve months the average has been much lower, or 78.

This is one explanation for the exaggerated volatility in single-family home prices. Condominium prices appear to be a great deal more stable but have now risen for two consecutive months.

Inflation

The house price index gives a reliable indication of developments in imputed rent, which Statistics Iceland (SI) measures for CPI compilation purposes. Because of this unexpected house price spike, imputed rent will in all likelihood rise more than we projected in our recent inflation forecast. It should be noted, though, that SI’s measurements have fluctuated somewhat less in the recent past than the house price index has. This will probably cause the CPI to increase by 0.7% instead of the 0.6% we had forecast.

Will house prices keep rising?

Forecasting about the housing market based on a single month’s measurement is an exercise that should be undertaken with caution. Examining longer-term trends is a far better approach. The past two months’ numbers indicate, however, that there is still significant demand for housing, and it must not be forgotten that the economy is still chugging along at a good clip. For instance, an all-time record of nearly 10,000 persons immigrated to Iceland in 2022. Most of them are foreign nationals, who constitute an unprecedentedly large share of the labour market. Population growth is a major determinant of housing market demand.

Another important factor is interest rates. Interest rates have a strong impact on demand, and given that the Central Bank’s (CBI) last rate hike of 1 percentage point was decided only a month ago, we have yet to see the full impact of rate hikes on the housing market. Because of the high rates on non-indexed loans, demand for indexed loans is on the rise and will probably keep growing, even though indexed loans are a mixed blessing in a high-inflation environment.

We have not embraced the view that house prices in Iceland will fall through the floorboards, as they have in neighbouring countries. This month’s housing market data strengthen us in that opinion. Nevertheless, we consider these price increases unusually large given current conditions, and we think it unlikely that they will become the norm, as they were a year ago. The likeliest scenario, in our opinion, is that house prices will settle into a new equilibrium in the near future, although they could easily continue to take us unawares now and again, as they did in March.