High interest rates leave Iceland’s housing market in deep freeze

Iceland’s housing market is facing a severe downturn as high interest rates make it difficult for construction companies to finance projects and leave them with completed homes they cannot sell, mbl.is reports.

The Federation of Icelandic Industries has called on the Central Bank of Iceland to leave its key interest rate unchanged at its next decision on August 19. Although inflation remains well above the bank’s target, the organisation says further rate rises could impose excessive restraint under current conditions.

Sigurður Hannesson, director-general of the Federation of Icelandic Industries, has warned of difficult conditions in the construction sector. According to information from the organisation, serious arrears in the sector at Iceland’s three major commercial banks nearly tripled during the first half of the year.

Páll Daníel Sigurðsson, managing director of construction company Eykt, agrees that raising interest rates this week would be unwise. He said many completed homes and homes under construction were absorbing substantial interest costs, while an increasing number of designers and contractors were looking for work.

Projects are being halted and few new projects are starting among companies building on their own account, he said. Eykt itself is in a relatively good position and has recently started two large interior projects, but Páll said the company’s situation did not necessarily reflect the market as a whole.

Thórvaldur H. Gissurarson, chief executive of construction company ÞG Verk, said the company had sufficient work and had not needed to make redundancies. However, homes had been slow to sell, forcing the company to slow its housing construction.

ÞG Verk also has large infrastructure projects, including work at Ölfusárbrú and Landspítali, allowing it to offset the contraction in the housing market. Thórvaldur described the housing market as being in an “abnormal state”: severely cold, but not completely frozen.

He warned that a prolonged contraction in housing construction could create another shortage of homes when demand returns. That could lead to renewed supply problems and prices getting out of control, he said.