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Iceland Mag

Economy

Real estate prices continue to soar: Too few small apartments being built

By Staff

  • Too few small apartments The average size of new one bedroom apartments has grown from 62.9 sqm (677 sq ft) in 1950-70 to 78 sqm (840 sq ft) in 2011-2016. Photo/Vilhelm.

Real estate prices in Iceland rose by 1.8% in February, marking the sixth month in a row when prices rise by more than 1%. Real estate prices have increased by 12.7% during this six month period. The main reason for rising prices is the shortage of small apartments suitable for first time home-owners.

Shortage of new affordable apartments
According to analysis by the government Housing Financing Fund the demand for new apartments far outstrips the supply. Especially when it comes to smaller apartments. During the pre-crash years contractors built more high-end luxury apartments and private homes than affordable housing. At the same time the average size of small apartments increased, which helped raise their prices.

The average size of new one bedroom apartment in 1950-1970 was 62.9 sqm (677 sq ft), 66 sqm (710 sq ft) in 1971-1990, 71.4 sqm (769 sq ft) in 1991-2010, and 78 sqm (840 sq ft) in 2011-2016. To meet population growth in the capital region at least 1,400 new apartments would have to be built every year. Since 2008 the average increase has been less than 700 apartments on average. The excess demand leads to rising prices.

Signs of overheating, but solid fundamentals
Analysis of the housing market by Íslandsbanki bank shows that real estate prices in Reykjavík have risen by 16% over the past 12 months, pushing real-estate prices to the levels at which they were prior to the financial collapse.

The bank points out that while there are several signs of overheating in the housing market, real incomes have risen much faster during the current boom in the housing market. Real incomes have risen by 9% in the past 12 months. Lack of supply goes a long way to explain the rest of the price increases.

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