Iceland review - 2019, Page 65

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were scheduled to be added by 2021. At the same
time, large investors, who had jumped into tourism
despite little if any experience in the industry, have
been pulling out of the hotel market.
Building more hotels is also crucial to relieve one
of the greatest pressures on the housing market:
short-term tourist rentals through booking sites
like Airbnb.
Airbnb nation
The 2010-2018 tourism boom would never have
materialised had it not been for Airbnb rentals,
which soaked up the excess demand for accommo-
dation. The number of short-term tourist rentals
in the capital region more than doubled between
2016 and 2018, from 2,032 to 4,154. A 2019 study
commissioned by the City of Reykjavík found
that a remarkable 5% of the housing stock of the
metropolitan area was listed on Airbnb, including
as much as 70% of apartments on certain streets
in Reykjavík. Icelandic Airbnb hosts could also
charge some of the highest rents in the world,
the “typical income” of local hosts in 2017 being
$11,300 (€10,108), according to data from Airbnb.
The impact on housing costs and rental prices has
therefore been significant. A 2018 study by econ-
omists at the Central Bank of Iceland found that
Airbnb was responsible for 15% of the increase in
real estate prices in 2015-2017.
The impact on the rental market has been
even more dramatic, especially in central parts of
Reykjavík, where small, affordable rental apart-
ments became nearly impossible to find. The aver-
age rental price for a one-bedroom apartment in
downtown Reykjavík is now $1,600-1,700 (€1,430-
1,520), having risen by more than 95% since 2011.
While new, stricter regulations on short-term
tourist rentals announced in 2018 have helped curb
the negative effect of Airbnb on the rental market,
market forces should also help relieve the pressure
by returning apartments to the rental market.
A silver lining in the bankruptcy of WOW air?
The bankruptcy of Icelandic low-cost airline WOW
air in March should speed up this process. Data from
Statistics Iceland reveals that the 15% drop in visitor
numbers between June 2018 and June 2019, largely
due to the bankruptcy of WOW, was not as severe a
blow to the economy as many had feared, leading to
just a 1% decrease in tourist spending. Two factors
could explain this remarkable state of affairs. On
the one hand, WOW air, as a low-cost airline, catered
more to budget travellers than its main competitor,
Icelandair. On the other hand, a weaker króna has
encouraged travellers to spend more.
The impact on Airbnb stays has been far more
dramatic. While stays at hotels and guesthouses
dropped 5% between June 2018 and June 2019, over-
night stays in Airbnb accommodation has dropped
by 29%. According to the July housing market
report by the Housing Financing Fund, this drop
has yet to be translated into effects on the housing
market, but investors I spoke to agree this will likely
change in the fall, as investors list Airbnb apart-
ments for sale or long-term rental after the peak
tourism season ends. “People who bought apart-
ments to rent out to tourists are getting tired of all
the work involved, the driving between apartments
to change sheets and towels. This work has not been
made easier by the new regulations, and many inves-
tors who bought these apartments in 2015 are now
more than happy to cash in on the price increases.”
A hard landing averted
Returning a few thousand Airbnb properties to
the market could help alleviate some of the pres-
sure on renters, but ultimately, the problem facing
the metropolitan property market will only be
solved with more construction. A government task
force recently found that the overhang of unmet
demand is still between 5,000-8,000 apartments.
The annual long-term need for new apartments,
due to population growth and other demographic
changes, is at least 1,400 apartments.
Data from the Housing Financing Fund sug-
gests we might come close to meeting this need
in the coming years. The fund estimates that
3,000 apartments will be completed this year, and
another 7,000 by 2021.
Crucially, the most dangerous threat to home-
owners and first-time homebuyers appears to
have been averted. The tourism boom, unlike the
banking boom of the 2000s, did not evolve into a
massive property bubble, and despite a crash land-
ing for one of Iceland’s two major airlines, a hard
landing for the housing market was averted.
A 2019 study commissioned by the City of Reykjavík
found that a remarkable 5% of the housing stock of the
metropolitan area was listed on Airbnb, including as much
as 70% of apartments on certain streets in Reykjavík.