Proposed rent cap could push landlords toward shorter leases

A proposed rent cap could lead landlords to favour shorter leases, Ragnar Sigurður Kristjánsson of the Icelandic Chamber of Commerce told Morgunblaðið, mbl.is reported.

A bill put forward by Social Affairs and Housing Minister Ragnar Þór Ingólfsson would limit regular rent increases during a lease. Rent could be adjusted according to the consumer price index, a fixed percentage or a fixed amount agreed in advance. Increases could not exceed the rise in the index, and at least 12 months would have to pass between them.

The bill aims to improve tenants’ housing security and make housing costs more predictable, while reducing the role of indexation. The Chamber of Commerce has not carried out a specific analysis of the effects on rental property owners, Ragnar Sigurður said. It has, however, warned that restrictions of this kind could ultimately reduce the supply of rental housing, particularly long-term rentals.

He said housing prices and wages generally rise one to two percentage points faster than the consumer price index. That could encourage landlords to sign shorter leases and reassess rents more often, he said.

When a fixed-term lease is renewed, the rent must still be fair and reasonable. The bill’s explanatory memorandum says the rent for comparable homes on the market is the main benchmark for assessing fairness. Ragnar Sigurður said fewer available homes and shorter leases would not improve predictability or housing security.

The memorandum also discusses the effects of changes to rental laws in 2024. It says concerns were raised that landlords were using indexed short-term leases lasting 13 months to get around the aims of those changes. Rental register data confirmed a move in that direction, particularly among profit-driven rental companies, the memorandum says. The rules were subsequently changed again.

The ministry’s assessment is that the proposed changes will improve tenants’ housing security and make costs more predictable. It expects base rents to be adjusted in line with expectations for future inflation, meaning the financial effects of the changes would be temporary.

The bill is proposed to take effect on July 1, 2027, and would apply to new leases as well as leases renewed or extended after that date.