Iceland heading for housing crisis

A housing crisis has been predicted for Iceland by the Icelandic Confederation of Labour (ASÍ). Gylfi Arnbjörnsson, Managing Director, said increasing interest rates and new bank policies which prevented home buyers from taking over old mortgages at the older, lower rate, will lead to the crisis.

“It is obvious that a crisis in the real estate market is unfolding,” Arnbjörnsson told local press.

According to Arnbjörnsson, the options available to homeowners in Iceland today are considerably worse than what they were three years ago. Not only are interest rates on mortgages increasing, but so too is the price of real estate. At the same time, banks have lowered the maximum mortgages available to buyers.

In the middle of 2004, the average price of an apartment in Reykjavik was ISK 17 million (USD$290,000) and interest rates sat at 4.15 per cent. The same apartment today is sold for an average of ISK 33 million (USD$563,000) and the interest rate is currently 6.4 per cent.

Another contributing factor to the impending housing crisis is the increasing rate of state-insured short-term securities. Three years ago, the rate was 3.4 per cent whereas today the rate has been set at 8.0 per cent.

The managing director of Kaupthing Bank’s Retail Banking, Fridrik St. Halldorsson, said, “I didn’t expect to see interest rates like this in Iceland ever again.”