Iceland review - 2019, Page 60

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Iceland Review
Some of the most pressing political and economic
questions in Iceland during the past decade have
been brought about by the dramatic upheavals
in the housing market. The Icelandic economy
has seen some turbulent ups and downs in recent
decades, namely one the largest financial crashes
in history, followed by a deep recession in 2008-
2010, and the spectacular tourism boom which
has only just begun cooling with the bankruptcy of
Icelandic low-cost carrier WOW air in March.
Perhaps the most intensely and widely felt effect
of the 2008 banking crash in Iceland was the dra-
matic collapse of housing prices. Home prices fell
by 35% in real terms between 2007 and 2010. The
effects of rapid inflation on indexed mortgages and
the puncturing of a 2004-2007 real estate bub-
ble, which had formed inside the dream of making
Reykjavík a global financial centre, wiped out the
equity of many homeowners, leaving 27% underwa-
ter on their mortgages in 2010.
How best to address the problems of homeown-
ers with negative equity was one of the most con-
tested political questions of the years 2009-2015.
“This was perhaps the defining political issue of
those years,” political scientist Eiríkur Bergmann
argues. “Mixed with legitimate concerns over gov-
ernment inaction, it also took on strong populist
elements, as housing costs directly impact the lives
of economically vulnerable people who research
shows are particularly open to populist messages.”
By 2016 the frustration over lost equity was
replaced with different housing market related
concerns: A rapid run-up in prices which raised
fears of a new real estate bubble, soaring rents in
the Reykjavík area, and a severe housing shortage.
Eiríkur points out that this had a similarly polaris-
ing effect. “It helped to radicalise many who didn’t
benefit from the recovery or felt they had lost out.
The situation was worst for those who lost their
properties in the wake of the crash and were forced
into the rental market where they got stuck when
housing prices soared again.”
Party like its 2007?
After remaining stagnant for three years, real
estate prices began recovering slowly in 2012. By
the second half of 2015, the price increase was pick-
ing up speed. Home prices in Iceland rose by 14.7%
in 2016, more than double the 6% average increase
worldwide, according to an analysis by London-
based research firm Knight Frank, making Iceland
the fastest growing property market in the world.
While stories of Icelandic property markets
setting world records had sparked feelings of mis-
placed national pride during the pre-crash period,
they now caused widespread unease. In April 2017
the market had fully recovered from the 2008 crash
with home prices exceeding the previous peak
reached in October 2007. The 23.5% year-over-
year increase recorded in May 2017 caused alarm
bells to ring. In the spring of 2017, the Icelandic
Confederation of Labour warned that the housing
market was showing worrying signs of a bubble.
This time it actually was different
Observers pointed out that real estate prices had
increased by 93% between 2011 and 2017, outstrip-
ping wage growth, which had been 65% over the
same period. But despite all the talk of a bubble
in 2016 and 2017, the post-crash property mar-
ket boom was fundamentally different from the
pre-crash bubble. Most importantly, the pre-crash
increases were fuelled by rising leverage, which was
largely absent in the post-crash period. According
to a report compiled by economists with The
Confederation of Icelandic Enterprise, household
debt increased by 79% between 2001 and 2007 but
shrank by 4% in the 2012-2017 period. As result,
homeowners now own more equity in their homes
than at any time since Statistics Iceland began
tracking the data in 1997.
The price increases between 2011 and 2017
were driven by fundamentals, rather than specula-
tion. The two most important factors were strong
population growth driven by immigration thanks
to robust economic recovery (GDP grew by 6.6% in
2016), and a severe housing shortage caused by the
shock of the 2008 crash.
The ruins of the “Icelandic financial miracle”
Since 2011, demand for housing has outpaced sup-
ply due to the simple reason that new construction
failed to keep up with demand. In the years 2000-
2008, an average of 2,500 new apartments were
completed each year compared to just 1,000 per
year in 2009-2015. At least 1,700 new apartments
per year are needed to keep pace with population
growth.
Home prices in Iceland rose by 14.7%
in 2016, more than double the 6%
average increase worldwide.