Rent cap could push up starting rents and shorten leases

A proposed rent cap in Iceland could prompt landlords to set higher initial rents and offer shorter leases, argues Andrés Magnússon in an article published by mbl.is. Central Bank Governor Ásgeir Jónsson called the proposal “obviously very stupid” after Wednesday’s interest rate decision.

The bill, introduced by Social Affairs and Housing Minister Ragnar Þór Ingólfsson, would amend the rental law to strengthen tenants’ housing security, reduce the role of inflation indexation and promote stability. Magnússon writes that the outcome will depend largely on how landlords respond and whether the changes increase or reduce the supply of rental housing.

The bill would require scheduled rent increases to be set at the start of a lease and linked to the consumer price index, a fixed percentage or a fixed amount. Increases based on a fixed percentage or amount could not exceed the index. At least 12 months would have to pass between increases, and monthly indexation of rent would be prohibited.

Landlords would still be free to set the initial rent. Separate provisions allowing increases because of significant operating costs or to bring rent into line with market rates would also remain. The proposed cap would therefore change when and where market forces affect rents, rather than remove them, Magnússon argues.

The bill’s explanatory notes acknowledge that initial rents could rise because of inflation expectations and the legislative changes, but describe the financial effects as temporary. Magnússon says landlords facing limits on future increases may protect themselves by charging more at the start of a lease. He also says the rules could encourage shorter agreements.

The article notes that, after changes to rental law in 2024, inflation-indexed 13-month leases became more common, according to data from HMS. Landlords used the contracts to avoid restrictions that were intended in part to encourage longer leases. The rules were later changed again, and the current bill would tighten them further.

Iceland’s rental market differs from markets where rent controls are more common, Magnússon writes. An assessment by HMS found that about 60% of tenants in Iceland live in homes owned by individuals, who make up the largest group of landlords.

HMS has also noted that most individuals who rent out homes finance them with mortgages, and that rents are fairly closely linked to mortgage payments. Landlords also pay interest, property taxes, insurance and maintenance costs, and need a return on their equity. If the rules make that return too low, Magnússon says, they may choose to sell their property instead.