High costs stall new housing projects in Iceland’s capital region

New, capital-intensive housing projects are unlikely to start in Iceland’s capital region in the near future because financing costs have become too high and banks are not expected to lend for such developments under current conditions, mbl.is reports. The assessment comes from Jóhann Halldórsson, managing director of S8 ehf., the company building the Hlíðarhorn housing project at Hlíðarendi.

Jóhann pointed to stricter bank lending requirements and rising financing costs. He said he was unaware of any new urban densification projects about to begin in the capital region, including developments where builders must buy plots and demolish existing structures before construction can start.

“As far as I know, no developer is about to start such projects in the capital region,” Jóhann said.

He said equity requirements had been raised to 35%. Previously, builders needed equity equivalent to 20% of construction costs. They now need equity equal to 35% of the sale price, he said.

Higher interest rates add to the burden. A simple calculation shows that it is more financially attractive for investors to keep their money in a bank account than to launch a housing project, according to Jóhann.

Although inflation-adjusted housing prices in the capital region remain high by historical standards, despite recent declines, Jóhann said new construction was still not financially viable under current conditions, particularly in Reykjavík.

At Hlíðarendi, road construction and infrastructure charges amount to ISK 300,000 for every ISK 1 million per square metre, he said.

“Reykjanesbær recently announced that building-right payments would be abolished. The same change in attitude is needed in Reykjavík,” Jóhann said.

He also rejected the argument that Reykjavík needs to collect such charges to fund infrastructure, saying that no infrastructure had been built at Hlíðarendi despite the construction of nine large apartment buildings containing nearly 1,000 homes.

Jóhann said the slowdown in construction would become apparent in a shortage of new homes within 18 to 24 months. As a result, he predicted that housing prices would rise by 20% to 30%.