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Rate rises starting to work?

28.06.2022 - 14:30
Mynd: Birgir Þór Harðarson / RÚV
The economy is stretched: according to the latest Hagstofa Íslands (Statistics Iceland) economic report, the economy will grow by over five percent this year, forecast private consumption and tourist numbers are up, and unemployment down. But inflation is the elephant in the room, at an estimated 7.5 percent this year. The property market is showing signs of cooling down, however.

According to Hagstofan, the effects of the war in Ukraine will last longer than previously predicted. But the single biggest factor affecting inflation is rising property prices, which the Central Bank has been trying to slow down with higher interest rates. There are now signs that is working.

“The outlook has improved in many ways, though uncertainty about inflation has increased, on the other hand. More inflation than we forecast last time. There is, though, more resilience in the economy than previously believed,” says Marinó Melsted, the head of research and analysis at Hagstofan.

Cooling property market

Fewer people are now attending open house events and fewer homes are selling above asking price, which seems to indicate higher interest rates are having an effect—both in tempering some people’s desire to buy property, and also stopping some others being able to secure property loans.

“Now is the first time we are seeing some indications of it. It is too early to assert confidently that the market is slowing, but hopefully,” says Kári S. Friðriksson, an economist with the housing and infrastructure agency, who adds that the market has not noticeably slowed since 2018.

Hannes Steindórsson, the chair of the estate agents’ association, agrees, saying: “There is a bit of a drop on open houses [drop-in sessions when anybody can view a home without pre-booking a viewing]. That is to say, instead of 20 or 15 coming, maybe seven or ten are coming. Fewer people come because prices are high. I don’t know for sure but the next two or three months I think it will continue to soften a bit. Prices have become rather high, but the big problem is still the number [shortage] of properties.”

Hannes says estate agents still need more homes to sell, as although fewer people are attending open house events, homes are still selling quickly. Fewer homes are selling for more than asking price today, partly because there are 57 percent more homes on the market today than in February—though this is not explained by any notable influx of new-build homes onto the market.

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