Iceland’s Housing Market Cools Down After Years of Growth

After a prolonged period of rapid appreciation, Iceland’s real estate market is now showing signs of stabilization and correction. According to Statistics Iceland, housing prices declined by 0.62% in real terms at the beginning of 2025—marking the second consecutive quarterly drop when adjusted for inflation. Despite strong demand in the previous year, the current trend suggests a possible shift in momentum.

A Long-Term Look: Cycles and Sensitivity

Over the past two decades, Iceland’s housing price index has increased sevenfold—from 100 in 2000 to over 750 in 2025. However, this growth has not been linear. For instance, in 2009, prices dropped by 14.71% in real terms, and in 2017, after three quarters of growth above 3%, the market corrected by -1.11%.

In 2022, global inflation and local economic factors triggered a nominal price jump of 20.27%, with a real gain of almost 10%—the largest spike since 2005. Yet this overheating led to a slowdown in 2023: despite nominal growth of 4.24%, real prices declined by 3.27%. The downturn was especially visible in Q1 and Q3, with quarterly drops of 3.37% and 2.56%, respectively.

Volatility in 2024 and New Decline in 2025

The market tried to recover in 2024, showing real-term growth of 1.17% and 3% in spring and summer, but it turned negative again in Q4 (-0.44%). By the end of the year, real growth stood at 3.79%, while nominal prices rose by 8.71%. This volatility was largely due to high interest rates, inflationary pressure, and changing buyer behavior.

In Q1 2025, prices again declined by 0.62% in real terms, suggesting the market may be entering a cooling phase.

Gross Yields and Investment Outlook

As Global Property Guide notes, inflation-adjusted prices offer a more accurate picture of the market’s health—especially in Iceland, where currency volatility and external dependencies can distort nominal figures.

Despite slowing appreciation, Iceland’s real estate still offers moderate investment potential. Average gross rental yields stand at 5.20% nationwide and 4.88% in Reykjavík—comparable to the European average but lower than in more affordable or riskier markets. One-bedroom apartments offer the best yields at 6.01%, followed by two-bedroom units (5.56%) and three-bedroom homes (5.51%). Studios yield around 3.83%, and properties with four or more rooms average 5.08%.

In comparison, gross yields are significantly higher in Lithuania (6.39%), Ireland (7.76%), and Italy (7.56%). All figures exclude taxes and maintenance. In Iceland, rental income is subject to a 22% capital gains tax, though up to 50% can be exempt if no more than two properties are rented and total income falls under a set limit.

A New Phase of Market Moderation

Iceland’s housing market is entering a new phase. While no crash like the 2008–2009 crisis is on the horizon, future fluctuations within inflationary expectations are likely, especially with elevated rates and global uncertainty. Investors and buyers should factor in market cyclicality and extended ROI periods.