Current Trends in the ICELAND Real Estate Market

Published on January 14, 2026 and written by Cyril Jarnias

The ICELANDIC real estate market is experiencing a paradoxical phase: prices continue to climb, but the frenzy of recent years is giving way to a form of tense “normalization.” Between a housing shortage, young households seeking a first purchase, still-high inflation, interest rates that are receding but remain heavy, and tourism pressure diverting part of the housing stock towards short-term rentals, the balance remains fragile. In this context, public authorities are trying to accelerate construction while pushing the sector towards particularly ambitious sustainability standards.

An Expensive, Tense, but Calmer Market Than at the Peak of the Surge

ICELAND has approximately 390,000 inhabitants, with nearly two-thirds concentrated in the capital region. This is where most transactions take place, and it’s also where prices reach their peaks.

In February 2025, the national residential price index still increased by 7.94% year-on-year, but this rise remains well below the peak of 11.89% observed a few months earlier. In real terms, i.e., adjusted for inflation, the increase is about 3.6%. In other words, the overheating is cooling down, without disappearing.

The Capital Region on the Front Line

Figures from the Housing and Construction Authority (HMS) illustrate the extent of the gap between the Reykjavík region and the rest of the country. Based on the three-month moving average ending in January 2025, prices are distributed as follows:

Geographic Area	Average Price (ISK)	Average Price (USD)	Annual Change
Capital Region	87,043,296	619,746	+11.06%
Neighboring Municipalities	64,603,678	459,976	+7.64%
Rural Areas	52,442,008	373,386	+3.61%

Within the capital region itself, single-family houses are appreciating more than apartments. Still in January 2025, a single-family house there averaged over 145 million ISK (approximately $1.03 million), compared to nearly 76 million ISK for an apartment.

Property Type – Capital Region	Average Price (ISK)	Average Price (USD)	Annual Change
Single-Family House	145,296,331	1,034,506	+11.67%
Apartment	75,977,558	540,958	+7.69%

Outside Reykjavík, the gap between houses and apartments narrows, but the trend remains the same: houses gain value significantly faster, including in rural areas where the average price of houses soared by nearly 13% year-on-year, while apartments there saw a slight decline.

A Slowing, but Not Reversing, Uptrend Cycle

Over the long term, the ICELANDIC residential market has experienced two major upward waves since the early 2000s. Before the 2008 financial crisis, prices had surged by about 150%, before correcting by about twelve percentage points at the height of the crisis. Since 2011, a new upward phase has taken hold, supported by a strong economy, a tourism boom, and low interest rates at the time.

Occasional corrections remain limited: in May 2025, prices fell by 0.45% nationally, mainly due to a drop of about 1.1% in Reykjavík, while regional areas continued to rise. We are still far from a cycle reversal, but the period of double-digit surges seems to be behind us.

Strong Demand, Young Households, and Volcanic Shocks

If prices are holding up, it’s primarily because housing demand remains strong. ICELAND is experiencing sustained population growth, largely driven by immigration, and an age structure favorable to first-time home purchases.

A Strong Push from the 22–29 Age Group

The cohort of 22–29 year-olds, traditionally the most active in the first-time buyer market, continues to grow. It has increased from less than 38,000 people in 2016 to over 44,000 in early 2024. This wave of young adults is entering an already tight market, where the interest rate cuts initiated by the Central Bank are starting to reopen the door to homeownership, but with still demanding conditions.

Grindavík, a Local Shock with National Effects

Recent volcanic activity on the Reykjanes peninsula has added an exogenous shock to the market. The town of Grindavík, declared dangerous, had to be largely evacuated. To avoid a humanitarian crisis, the state created the public company Þórkatla, tasked with buying back threatened homes and relocating residents.

The capital region accounts for 59% of these sales, but it is the South Peninsula, the epicenter of the phenomenon, that shows the strongest transactional momentum. Only the Eastern region recorded a decrease in the number of deeds.

Supply is Increasing… But Not Where Needed, Nor Fast Enough

In the face of this demand, supply is reacting, but in an imperfect way. Construction starts and deliveries are progressing, while remaining below estimated needs, and the geography of construction does not always match market expectations.

More Homes Delivered, but a Pipeline that is Shrinking

In 2024, 3,486 new homes were completed across the country, an increase of over 13% compared to the previous year. In January and February 2025 alone, 585 homes were delivered, representing an impressive increase of nearly 38% compared to the same period in 2024.

HMS projections still forecast between 3,100 and 3,600 deliveries in 2025, but then expect a drop to 2,400–3,000 in 2026, before a modest rebound the following year. Without a significant revival in construction starts, the structural shortage risks reactivating by the mid-decade.

Structural Blockages in Planning

Construction professionals denounce a series of recurring obstacles: planning procedures deemed unpredictable, scarcity of buildable land, approval times considered too long, changing municipal rules, high fees and charges, and complex easements.

Added to this is a problem of supply calibration: some municipalities have imposed high minimum sizes for apartments, which has produced a surplus of large homes less suited to actual demand, particularly that of young households and modest-income families.

Sales Times Lengthening, Especially for New Builds

Another sign of a market in flux is the lengthening of sales times. In early 2025, the average time on market approached five months, two more than in mid-2024. The difference between new and old is striking: existing homes sell in three and a half months, compared to about fourteen months for new homes.

In the greater Reykjavík area, nearly 4,000 properties were for sale in spring 2025, of which more than half were new constructions. Nationally, the number of available properties reached 4,400, a record since 2017. The new-build market thus seems to be entering a digestion phase, with a significant volume on display but a slower absorption rate.

A Rental Market Under High Pressure: Soaring Rents and Growing Private Sector Role

Alongside the transaction market, the ICELANDIC long-term rental market is going through its own crisis. Rents are rising faster than purchase prices and faster than general inflation, while the proportion of renting households is increasing.

Rents Rising Faster Than Prices

In February 2025, the real rent index – the “effective rents” component of the CPI – climbed 10% year-on-year, while overall inflation hovered around 4.2%. The HMS rent index for the capital region even showed an 11.4% annual increase.

Average levels show a market that has become very expensive:

Indicator (February 2025)	Average Amount (ISK)	Average Amount (USD)
Average Rent per Dwelling	263,318	1,874
Studio / 1 Room	186,861	1,330
2 Rooms	241,645	1,720
3 Rooms	284,042	2,022
Average Rent per m² – Iceland	3,639	25.90
Average Rent per m² – Reykjavík	4,041	28.76
Average Rent per m² – Kópavogur	3,810	27.12

In one year, rent per square meter increased by 8.5% nationally, by 9.8% in Reykjavík, and even by over 10% in Reykjanesbær. The pressure is therefore particularly strong in and around the capital, where jobs, universities, and services are concentrated.

Massive Indexation and Rental Law Reform

The rent dynamic is amplified by the architecture of contracts. About 70% of leases are indexed to the CPI, with monthly revision, which almost mechanically transmits any inflationary pressure to the tenant. A cause-and-effect link that, for over thirteen years, has proven tight between mortgage repayment costs and rent levels, with landlords passing on their increased monthly payments.

More Renters, More Large Landlords

In this context, the share of adult renters is increasing, from 13% in 2020 to 16% in 2024 according to surveys. HMS estimates, however, that nearly 37,000 people, mostly foreigners, are likely undercounted, which would bring the actual proportion of renters to nearly 29% of adults.

At the same time, the country has seen the emergence of large for-profit rental operators, while the state encourages the development of non-profit players. This movement is gradually bringing the ICELANDIC model closer to that of other Nordic countries where institutional landlords play a structuring role.

For investors, gross yields remain attractive: around 5.2% on average nationally, and nearly 4.9% in Reykjavík. But these figures must be weighed against a historically high cost of capital.

Interest Rates: A Cautious Loosening After a Very Tight Cycle

The other key to the ICELANDIC real estate market lies in monetary policy. After aggressively raising its rates to curb inflation that peaked at 8.7% in 2023, the Central Bank initiated, from October 2024, a series of gradual cuts.

The key seven-day deposit facility thus went from 9.25% to 7.75% in March 2025, then to 7.25% in the fall. Even at this level, the cost of money remains significantly higher than in other Nordic countries, where mortgage loans are often between 3% and 5%.

A System Dominated by Indexed Loans

ICELAND stands out for the considerable place of inflation-indexed loans. About 60% of outstanding housing loans are linked to the CPI: these loans offer a lower nominal rate, but the remaining principal adjusts with price increases. Conversely, non-indexed loans carry higher nominal rates, but a fixed principal.

For households, the trade-off remains complex: accept a high monthly payment but a stable principal, or a lighter initial burden at the cost of a principal that swells in case of a resurgence of inflation. This dilemma partly explains why falling rates do not immediately translate into massive relief on repayments.

Significant, but Better Managed, Debt

In 2024, new housing loans reached about 157 billion ISK, up more than 18% after two years of sharp contraction. The total stock of mortgage loans managed by deposit banks approached 1,940 billion ISK in early 2025, or about 42% of GDP, down from the peak of 48% observed in 2021. If loans from pension funds and the public entity HMS are included, the outstanding amount rises to 2,760 billion ISK, nearly 60% of GDP.

Tourism, Airbnb, and Pressure on Locals’ Accessibility

It is impossible to talk about ICELANDIC real estate without mentioning tourism. This sector accounts for about 6 to 9% of GDP depending on the year and exploded after the 2008 banking crisis. In some recent years, tourists have been up to six times more numerous than residents.

A Direct Link Between Visitor Influx and Real Estate Prices

Macroeconomic studies show that a tourist demand shock leads to both rising rents and real estate prices. The mechanism is simple: more tourists means more demand for accommodation, which pushes nightly rates up. Entrepreneurs then invest in properties intended for tourist rentals, which reduces the supply available for residents and makes the market more expensive.

A Highly Seasonal Short-Term Rental Market

Data on short-term rentals confirms the extreme seasonality of the market. In the capital region, there are nearly 2,000 active listings on platforms like Airbnb. The average occupancy rate is around 54%, but climbs to over 60% during the summer, a period when average monthly revenues frequently exceed $6,000 for the best properties.

This intensive use of the residential stock for tourist rentals comes at the expense of the long-term rental market, particularly in the central neighborhoods of Reykjavík where residents are gradually being pushed to the periphery. Shops and services there adapt more to the needs of visitors than residents, fueling a recurring political debate on the regulation of tourist accommodation.

“Green” Shift: Construction Under Environmental Constraint

ICELAND already has the particularity of producing 100% of its electricity and heating from renewable sources, mainly thanks to hydro and geothermal power. This energy lead is now coupled with a major regulatory shift in building.

Since September 1, 2025, new construction projects falling under certain categories must integrate a comprehensive Life Cycle Assessment (LCA) of buildings. This obligation, adopted by HMS in 2024, is part of a national roadmap aiming for a 43% reduction in construction emissions by 2030.

This new framework increases design and construction costs in the short term, in a country where climatic constraints already imposed high standards for insulation, wind resistance, and thermal performance (triple glazing, geothermal heat pumps, advanced technical management systems). But it should strengthen, in the medium term, the image of a deeply “green” market, likely to attract investors and occupants concerned about their environmental footprint.

Towards a More Balanced Market… But Lastingly Expensive

Despite these tensions, most analyses converge on the idea that the ICELANDIC real estate market is heading towards a form of relative balance. The supply of homes for sale has expanded significantly, times on market are normalizing, interest rates are gradually falling, and inflation is slowing.

Nevertheless, several factors suggest that ICELANDIC real estate will remain lastingly expensive and demanding for households:

– the concentration of population and jobs around Reykjavík;

– strong urban planning and environmental constraints that limit sprawl;

– high construction costs, exacerbated by the climate and new sustainability standards;

– tourism pressure that will continue to capture part of the housing stock;

– a credit system where rates, even when falling, remain significantly higher than in other Nordic countries.

For households, the challenge is quite different: accessing homeownership without excessive debt, or finding decent housing at an affordable rent, in a country where the cost of living is already among the highest in Europe. This is where, in the coming years, the authorities’ ability to reconcile economic attractiveness, social justice, and ecological transition in one of the continent’s most unique real estate markets will be tested.