Higher interest rates set to reduce rental housing supply

Higher interest rates have reduced new housing construction and will lead to a smaller supply of homes, including rental properties, once current projects are completed, mbl.is reports. Egill Lúðvíksson, chief executive of Ívera, Iceland’s largest privately operated residential rental company, said the effects would become visible in the coming years.

Ívera currently owns 1,728 apartments. The company has also completed deals involving the purchase and development of additional homes, bringing its expected total to about 2,200 apartments entering its portfolio between 2026 and 2029.

“This includes projects that are under way, although some are still in the design phase,” Egill said. The company bought a plot at Ártúnshöfði earlier this year and plans to develop housing there.

Its projects range from homes due to be ready for handover this autumn to developments still in the detailed planning or design process. Egill said progress had been satisfactory, although the company’s goal of reaching 3,000 apartments by 2030 was ambitious and depended on whether external conditions made continued expansion sensible.

The Central Bank of Iceland’s policy rate is now 8%. Egill said higher rates had mainly affected the company’s surrounding environment by weakening demand in the housing market. This had affected contractors and developers, in turn slowing projects at the early stages of the housing construction chain.

“We clearly feel that new construction has declined, as has the purchase of plots for new developments and the approval of plans by financing institutions,” he said. “There are fewer and fewer projects at the initial stage.”

Egill said the number of homes, including rental apartments, would probably increase more slowly than previously expected. However, he noted that the market was emerging from a period of heavy construction and that data on homes under construction or nearing completion did not yet indicate a contraction, since development takes several years.

He said it could take up to three years for interest-rate increases to affect the supply of new homes, because of the time required to build them. The impact of reduced supply could therefore appear in 2028 or 2029.

Egill described the coming winter as challenging but said it was difficult to predict when conditions would improve. He did not want to say whether the current situation offered good opportunities to buy residential property.