Published on and written by Cyril Jarnias
The spectacular rise of tourism has profoundly transformed the economy of ICELAND. In the span of about fifteen years, the country has gone from being an economy in crisis after the 2008 banking shock to a star destination for travelers worldwide. This transformation, however, has not been limited to hotels and travel agencies: it has reshaped the real estate market, upended the residential geography of Reykjavík and tourist regions, and fueled an acute housing crisis.
To grasp the Icelandic real estate market, it is essential to understand the interaction between tourist flows, seasonal rentals, the regulatory framework, and investment strategies. This analysis is crucial, whether you are a resident, investor, or observer.
A solid but strained real estate market
The Icelandic real estate market is often described as stable, transparent, and well-regulated legally. Local and national authorities have detailed land registries, rules for registering leases and transactions are strict, and legal security is considered high. On paper, everything points to a healthy market.
Iceland’s total population, nearly two-thirds of which is concentrated in the capital region.
The rapid rise in prices attests to this. Since 2010, residential prices have jumped by more than 150%, making ICELAND one of the European countries with the most marked price progression. Between 2020 and 2023, prices continued to climb at an average rate of about 8% per year. In 2024, the national residential property price index rose another 7.94% year-on-year in February 2025, or 3.58% in real terms after inflation.
In the Icelandic capital region, real estate prices have increased sharply: single-family homes have gained between 9% and 11% in value year-on-year, and apartments between 6% and 8%. In the spring of 2024, the minimum entry price on the Reykjavík market was 60 million ISK, with an average price around 87 million ISK (over $600,000). This high cost explains why more than half of Icelanders aged 18 to 24 still live with their parents.
This context cannot be explained by demographic or economic fundamentals alone. Tourism plays a key role in this surge.
Tourism, an economic engine and a housing shock
After the collapse of the banking system in 2008 and the sharp devaluation of the króna, ICELAND bet on tourism to revive its economy. The 2010 Eyjafjallajökull eruption, paradoxically, provided a global showcase for its landscapes, while social media, series, and films shot on location cemented the country’s place in travelers’ imaginations.
Tourism-related output accounted for nearly 18% of the economy.
This powerful wave of demand is based on the joint consumption of tourist goods (excursions, dining, transport, activities) and accommodation. However, accommodation is not limited to hotels: it increasingly mobilizes the residential housing stock through short-term rentals.
An academic study using a DSGE model demonstrates that a tourist influx stimulates rental demand, leading to rising rents. This rise incentivizes investors to buy properties for the tourist rental market, which drives up real estate prices and reduces the supply of housing for local residents.
Statistical decompositions from the same model confirm that shocks related to tourist demand and manufacturing technologies are among the main drivers of fluctuations in real estate prices, consumption, and investment in ICELAND.
Airbnb and the “touristification” of Reykjavík
If one looks for a symbol of this shift, it lies with short-term rental platforms, particularly Airbnb. The figures for the capital are spectacular.
The number of Airbnb listings in the Reykjavík metropolitan area in early 2018, representing nearly 5% of the region’s housing stock.
More recently, it is estimated that nearly 3,800 apartments in Reykjavík are listed on Airbnb, representing about 7% of the city’s entire residential housing stock. In other words, in the heart of the capital, a significant portion of buildings has, in effect, shifted to tourist use.
Data from several studies show that most listings are for entire homes, often permanently removed from the long-term rental market. In a qualitative sample of 33 hosts managing 149 listings, more than two-thirds of the homes had been permanently withdrawn from conventional residential rentals.
A centrally located apartment in Reykjavík illustrates the economic incentive: a two-room apartment on a standard lease yields about €1,300 per month, while the same property on Airbnb can generate nearly €4,500 monthly in high season. This considerable gap strongly encourages owners to target the short-term tourist market.
A specific econometric study on Airbnb estimated that the platform’s growth alone contributed to a real increase in property prices of about 2% per year over a three-year period, accounting for about 15% of the total increase recorded. This is not marginal: in an already tight market, this additional layer of demand has had a significant impact.
When housing becomes tourist infrastructure
This phenomenon is not limited to the capital, although Reykjavík concentrates about 80% of the metropolitan area’s listings. Other tourist regions, like the South, the south coast, the areas around the “Golden Circle,” or the North around Akureyri and Húsavík, are seeing the development of a growing stock of second homes, vacation cottages, and seasonal accommodations.
In some struggling rural municipalities, the proliferation of “second homes” has been seen as an opportunity: it helps maintain buildings, generates income, and supports some service jobs. But it also reduces the number of primary residences, thus regular tax revenues, and alters the social structure, with villages occupied mainly in summer or on weekends.
Around heavily visited sites like Gullfoss and Geysir, many Icelandic owners rent out their country houses or “summerhouses” to tourists. This practice now integrates housing as an essential component of tourist infrastructure, on par with roads or national parks.
The question then becomes territorial: where the permanent population is very low, especially in rural areas, the number of visitors can reach several tens, even hundreds, of times that of the residents. In the south of the country, a region of only 35,000 residents receives about 2 million visitors per year, including nearly 80% of the international tourists who come to ICELAND. This disproportion creates obvious pressure on land and buildings, not always accompanied by sufficient public investment in roads, services, and accommodation for seasonal workers.
A housing crisis fueled by tourism
Iceland faces what its own authorities describe as a “serious housing crisis.” Purchase prices and rents have risen faster than anywhere else in Europe over the last decade. In a recent period, rents increased by 12.6% in one year, while the general price index rose “only” 4.8%, and sales prices by 7.7%. From May 2023 to May 2024, the rent index increased another 13.3%.
The result is a marked loss of purchasing power for households, particularly the most modest. Many young adults are giving up on leaving the family home: over 55% of 18-24 year-olds lived with their parents in 2021. In the Reykjavík region, rental properties are smaller, more expensive, sometimes poorly maintained, but find takers due to a lack of alternatives.
Number of additional housing units needed over the next decade to stabilize the housing market.
Demand has simultaneously been strengthened through several channels: population growth (the population increased by 3% in 2023 alone, a record since the 18th century), a rise in the number of young adults, the massive arrival of foreign workers (the share of immigrant employees rose from 11% to nearly 24% of total employment in ten years), often employed in tourism and construction, and forced displacements like that of the residents of Grindavík, a village evacuated after volcanic eruptions whose residents had to be relocated to other municipalities.
Tourism exacerbates the housing crisis by removing thousands of apartments from the residential market for short-term rentals, attracting a workforce that increases demand in a saturated housing stock, and fueling an investment bubble through the massive purchase of properties intended exclusively for tourist stays.
A central bank survey concluded that a significant part of the rise in real estate prices stemmed from acquisitions made specifically for the short-term rental segment. In a country where the housing stock per capita is already among the lowest in Europe, this eviction of local households by tourist demand strongly amplifies the crisis.
Rental profitability boosted by visitors
For investors, tourism has made ICELAND an attractive real estate market, particularly in high-traffic areas. Gross yields on the long-term rental market average around 5.2% nationally, and about 4.9% in Reykjavík, with variations by neighborhood. In less prestigious sectors or areas outside the center, yields can be slightly higher, at the cost of lower appreciation potential.
Seasonal rental properties (cottages, houses, apartments) in tourist areas often show estimated gross yields between 6% and 8%. These yields are highly seasonal and depend on visitor numbers. Maintaining a high occupancy rate outside the peak season is crucial, especially as the tourist season tends to spread across four seasons, notably thanks to attractions like the northern lights in winter.
The tax structure enhances the appeal of rental investments: property income tax is levied at a rate of 22% on net income, but for standard residential rentals, only half of the gross rent is considered taxable. For tourist accommodations, a reduced VAT rate of about 11% applies, with a registration requirement if turnover exceeds a threshold, while income from “heimagisting” (renting out one’s primary residence) is taxed as capital income without the possibility of deductions.
Transaction fees for purchasing a property in France represent about 2% to 4% of the price, including transfer tax and professional fees.
The table below illustrates some key data on prices and yields, related to the tourist attractiveness of different areas.
| Indicator | Capital Region (Central Reykjavík) | Other Urban Areas (Akureyri, etc.) | Rural Tourist Areas (South Coast, Cottages) |
|---|---|---|---|
| Average price per m² (approx. in €) | 5,500 – 6,200 | 3,000 – 3,800 | 2,800 – 3,500 |
| Long-term gross rental yield | 4.5 – 5.2% | 4.0 – 5.0% | 4.5 – 5.5% |
| Tourist gross rental yield | 6 – 8% (seasonal) | 6 – 8% (depending on flow) | 6 – 8% (very marked high season) |
| Tourism’s weight in demand | Very High | Medium | Very High |
This profitability explains the rush for properties located in Reykjavík’s most frequented neighborhoods, along Laugavegur–Hverfisgata or near the old harbor, where Airbnb listings overlap with existing hotels. It also explains the enthusiasm for riskier investments in the regions, where tourism can revitalize municipalities in demographic decline, but at the risk of disconnecting prices from local capacities.
Constantly rewritten regulations
Faced with growing tensions in the housing market, Icelandic public authorities have progressively tightened regulations on short-term rentals. A first law, adopted in 2016, introduced a specific framework for individuals renting out their homes (“heimagisting”). The idea was to formalize these activities while limiting excesses.
A resident owner can rent out their primary residence (or sometimes an additional property) for a maximum of 90 days per year, with an annual revenue cap of about 2 million ISK. If these thresholds are exceeded, the “homestay” license is no longer accessible. The owner must then comply with the professional accommodation regime, which applies mainly to commercial real estate as well as farms and rural lodgings.
The rules require registration with the authorities, a license renewed annually, compliance with safety and health standards, and VAT collection. Yet, a 2019 survey showed that nearly 58% of Airbnb listings in Reykjavík did not mention a license number, suggesting a high level of illegality or non-compliance.
A new law prohibits companies from renting out residential properties for short stays. Only individuals can do so, within the limit of 90 days and subject to an income cap. Professional accommodations (hotels, guesthouses, etc.) must be located on plots zoned for specific commercial or agricultural use.
Penalties for violations are dissuasive: fines of up to one million ISK per violation, removal from registries, a ban on new registration, and reporting to the tax authorities. This approach aims to “re-residentialize” some central neighborhoods, forcing institutional investors and multiple-property owners to fall back on strictly commercial stock or return to long-term leases.
In parallel, the government has announced new emergency measures to address the rental crisis: amendment of tenancy laws, mandatory registration of landlords, encouragement for the development of social or non-profit housing, and consideration of a form of rent control in the most strained areas.
The benefits of tourism in terms of growth, jobs, and export earnings are undeniable. But the flip side is a high social cost, concentrated on modest households and younger generations. The president of the main trade union confederation summarized the situation by stating that “tourism creates inflation, and it’s the ordinary wage earner who pays the price.”
Nearly 70% of rental contracts are indexed to the price index, mechanically amplifying inflation on rents.
Rent increases are also fueled by high interest rates. Even though the central bank has begun an easing cycle, its key interest rate remained around 7.75% in early 2025, after a peak of over 9%. New non-indexed mortgages often carry interest rates between 9% and 10%, significantly increasing repayment costs that landlords then seek to pass on to their tenants.
A significant proportion of mortgages – about 60% – are moreover indexed to inflation, which partially protects lenders but strengthens the link between general inflation and housing costs. The weight of these costs explains the persistence of rental tensions, despite an expected stabilization of sales prices.
In Reykjavík, the massive conversion of housing into tourist rentals leads to residential displacement (evictions, forced or voluntary seasonal departures), the closure of school classes, and the transformation of local shops into visitor-oriented establishments.
Interestingly, a survey commissioned by the Reykjavík tourism office shows that only a minority of residents (about 13%) report experiencing direct negative effects from Airbnb rentals, while over 70% do not perceive any. The most critical attitudes are sometimes found in peripheral, less touristy neighborhoods, where rising housing prices are felt without benefiting from tourism’s direct spillover effects, for example in districts like Breiðholt or Mosfellsbær.
A housing supply hampered by planning constraints
While tourism increases demand, the market’s capacity to respond with a new supply of housing remains limited. Icelandic urban planning rules are strict, in a country that makes protecting natural landscapes a pillar of its planning policy. The opening of new buildable land is regulated, planning processes are considered slow and sometimes unpredictable, and development costs and municipal taxes are high.
Developers identify three major obstacles: a shortage of developable land, long permit approval times, and production requirements sometimes misaligned with demand (such as too many large apartments when the need is for more modest housing for young couples and workers). These constraints limit supply in the face of strongly rising demand, stimulated by population growth, the return of Icelanders post-crisis, labor immigration, and the tourism boom.
A few large projects illustrate attempts at rebalancing, such as mixed-use developments around the international airport (K64 project), or the redevelopment of urban sectors in Reykjavík (Orkureitur, Skeifan, Keldur, etc.). In some cases, a simple change in a zoning plan was enough to double the value of a plot, even before construction began, so sought-after is the residential potential.
Summary of the evolution of housing production and demand pressure, in a context of growing tourism.
Analysis of recent trends in construction and the supply of new housing to the market.
Assessment of the intensity of real estate demand and its determining factors.
Examination of the impact of tourism growth on real estate market dynamics.
| Indicator | 2023 | 2024 | 2025 Trend |
|---|---|---|---|
| Housing completions (units) | ~3,080 | 3,486 | 3,100 – 3,600 (forecast) |
| Housing under construction (March) | ~7,970 | 7,181 | Decrease of about 10% |
| Estimated annual needs to stabilize market | 4,000 – 4,500 | 4,000 – 4,500 | 3,500 – 4,500 (decade) |
| Annual number of tourists (approx.) | 2.2 M | 2.3 – 2.5 M | Moderate increase expected |
The persistent gap between actual production and estimated needs sustains the shortage, especially as many new housing units end up being absorbed by the tourist rental market in high-traffic areas.
Foreign investment: regulated openness
For international investors, ICELAND is a market that is both attractive and constraining. Attractive because the economy is solid, well-rated by agencies, the legal framework is transparent, rental yields are higher than in many European capitals, and tourism offers a robust demand base. Constraining because regulations limit access to property ownership, particularly for nationals outside the European Economic Area.
Citizens of the EEA and EFTA with legal residence in Iceland can buy real estate under the same conditions as Icelanders. Conversely, nationals of third countries must obtain authorization from the Ministry of Justice. This is generally granted if they have a strong connection to the country (marriage, long-term residence) or if the acquisition is part of a local professional activity project. The area of property purchasable by non-EEA nationals is generally limited to 3.5 hectares, and agricultural land is reserved for Icelandic citizens.
The purchase of real estate does not grant access to a residence permit or citizenship: there is no Icelandic “golden visa” linked to real estate investment, unlike some southern European countries.
For foreign buyers, obtaining local bank financing in Iceland is more demanding: banks typically require a personal contribution of 30% to 50%, proof of local income, and a good credit history. Consequently, many investors opt for a cash purchase or financing from their home country. It is also important to consider the exchange rate risk linked to the historical volatility of the Icelandic króna.
Towards a new compromise between tourism and housing?
The central question for the coming years is that of the balance between a tourism industry that has become a pillar of the economy and residents’ right to housing. Several signals show that Icelandic authorities are gradually becoming aware of the limits of the current model.
A tourist tax system has been reintroduced and strengthened, with amounts per night and per cruise passenger, to fund infrastructure and environmental protection. The central bank, in its financial stability report, mentioned the possibility of limiting tourist flows through tax or fee increases, notably due to “crowding out” effects on other sectors and the housing market.
The government promotes sustainable tourism respecting site carrying capacity. Regional management plans incorporate the need for adequate housing solutions for seasonal workers, often foreign and less inclined to invest locally.
Nevertheless, the dynamic will not reverse overnight. Hotel investments continue, and the hotel room stock is increasing, even if growth rates are more moderate than at the peak of the boom. The pipeline projects several thousand new rooms in the medium term, particularly in the capital region and on the Reykjanes peninsula. This expansion of classic hotel capacity could, over time, absorb some of the demand currently captured by short-term rentals and somewhat relieve the residential stock.
Demand for sustainable and energy-efficient construction is increasing in Iceland, driven by local buyer expectations and the country’s international image of running on 100% renewable energy. New projects increasingly incorporate environmental criteria, which can, in the long term, enhance property values in well-managed tourist areas.
A fragile and revealing equilibrium
The Icelandic experience illustrates, in an almost caricatural manner, the tensions facing many highly touristed destinations: how to benefit from the economic spinoffs of tourism without sacrificing housing affordability, social cohesion, and territorial balance?
Iceland is a case study in ‘overtourism’ due to the scale of the tourist shock relative to its small size and the sector’s importance in its GDP. This phenomenon has been amplified by an already tight real estate market, an influx of visitors vastly outnumbering the local population, and a regulatory framework that didn’t keep pace with the rise of digital platforms, directly impacting the city and housing.
The figures are telling: prices multiplied by over 2.5 in a decade, rents rising at double-digit rates, a growing share of adults forced to rent in a tight market, a significant portion of the capital’s housing stock oriented towards stays, construction needs far exceeding output, and a growing perception of a housing crisis as the main driver of inflation for households.
Authorities are responding to mass tourism with regulatory tightening, investments in housing supply, increased tourism taxation, and consideration of capping visitor flows. The effectiveness of these measures in limiting the eviction of residents from the real estate market remains uncertain, with a more brutal correction (a drop in visitors due to economic or environmental shocks) being possible.
In any case, the link between tourism and real estate in ICELAND will remain at the heart of public debate. It conditions the future of Reykjavík as a living and inhabited city, the fragile balance of small rural municipalities, and the country’s ability to combine global attractiveness with quality of life for its inhabitants.
A French business owner, around 50 years old, with a well-structured financial portfolio in Europe, wanted to diversify part of his capital into residential real estate in Iceland to seek rental yield and exposure to the Icelandic króna. Allocated budget: €400,000 to €600,000, without using credit.
After analyzing several markets (Reykjavík, Kópavogur, Hafnarfjörður), the chosen strategy involved targeting an apartment or small single-family home in a dynamic Reykjavík neighborhood, combining a target gross rental yield close to 8–10% – keeping in mind that “the higher the yield, the greater the risk” – and potential for appreciation linked to the tight rental market, for an all-in cost (acquisition + fees + potential renovations) of about €500,000. The mission included: selection of city and neighborhood, connection with a local network (real estate agent, lawyer, Icelandic tax advisor), choice of the most suitable structure (direct ownership or via a local company), and integration of this asset into an overall wealth management strategy.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
