Housing bubble Iceland, an article by Jordi Pujolà, Spanish writer in Iceland
Housing Bubble Iceland
Before moving to Reykjavik, I was a real estate broker in Barcelona. I was tired and needed a change so I quit and became a professional writer in Iceland. I published my first novel with Camelot titled We Need a Change: The Dream of Iceland one year later. I have never regretted my career change, but I still like checking out housing markets. Based on my experience, I conclude that the housing bubble is repeating in Iceland.
The current housing bubble in both rentals and sales is caused by two issues. First, 1,3 million tourists are expected to visit Iceland this year and the prospects are upwards. As a consequence, investors have started greedily buying buildings and flats to rent them to the tourists. However, Iceland, with a current population of 335,000 inhabitants, can’t hold this progression (3 million tourists in 3 years?), and tourism will stagnate very soon if the government doesn’t plan it carefully and invest money in the sector. Capital controls are the second factor. After the severe economic recession in Iceland and collapse of the national currency, the parliament, as a protective measure, limited drastically sales of Icelandic Króna. That means international investors can’t take their money out. Instead, they must the only way of buy Icelandic government bonds or real estate properties to realize their profits. So prices have continued to rise.
As happened in Barcelona, the real estate bubble can last for several years without apparently damaging the wider economy since the real estate market itself benefits from the bubble. During economic growth, harmful housing bubble effects are not perceived, quite the contrary, it produces a false sense of wealth that, in many cases, encourages private investors to take on more debt and encourages credit expansion by the banks which also increases inflation. On the other hand, during recession, enterprise’s profits fall, capital flow decreases and unemployment rockets. As a consequence, banks no longer lend money, companies and private owners are not able to pay their loans and prices collapse. The bubble implodes.
Although the housing bubble is inevitable, there are remedies. Promoting more social buildings to rent them out in every neighbourhood (in order to not create ghettos) at subsidised prices is one such remedy. People who live in Iceland search for affordable housing. More subsidies would open up this market and cause all prices to fall. Besides that, this policy would connect with the original Nordic socialism again. Strictly regulation of tourist services is another remedy. All kind of accommodation should pay taxes and pass quality controls.
The question is to know the impact of the Icelandic Króna at the moment the capital controls disappear. The good news is the government is trying to do it gradually. However, when Icelandic Króna will be on the open market, it likely will be attacked by vulture funds. An isolated currency of a country with an economy in recovery as Iceland is much more vulnerable than those formed by an alliance of states. Nevertheless, I am optimistic because the Icelandic economy has enough resources such as energy, fish and tourism to stabilize it and avoid disaster.
Good luck, Iceland.
Housing bubble Iceland is the last post of Jordi Pujolà. More articles on http://escritorislandia.com/blog/
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Jordi Pujolà writer and economist