Iceland: Selected Issues

IMF Staff Country Reports, June 27, 2022

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Iceland: Selected Issues

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Bibliographic details

• Published: June 27, 2022
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9798400214608.002

Summary and key findings

• This Selected Issues paper on Iceland analyzes housing market risks and housing affordability.
• House prices in Iceland have increased markedly since the onset of the coronavirus disease-pandemic, with signs that the valuations have exceeded macro fundamentals and long-term trends.
• Overvaluation has important implications for macroeconomic and financial stability, and housing affordability.
• House price cycles seem to be closely linked with the business cycle, indicating an amplification risk in the event of price correction.
• IMF’s quantitative analysis examines the interplay between house prices and related factors.

Analysis and outlook

• The ongoing monetary policy tightening cycle should help address Iceland’s house price pressures.
• Further macroprudential tightening through binding and effective borrower-based measures could help contain systemic risks and create further buffers in the financial sector.
• In the medium term, focusing on structural measures that reduce construction costs and increase supply by eliminating red-tape and reducing the period for obtaining building permits is likely to have the highest pay-off.

Policy recommendations

• Continue and calibrate monetary policy tightening to address house price pressures.
• Implement further macroprudential tightening, prioritizing binding and effective borrower-based measures to contain systemic risks and enhance financial-sector buffers.
• Pursue structural reforms to reduce construction costs and increase housing supply, including eliminating red-tape and reducing the period for obtaining building permits.

Subjects and keywords

• Subject: Environment, International organization, Monetary policy, National accounts, Prices, Taxes
• Keywords: C. informing housing market policy, Carbon tax, D. containing housing market, Energy exchange transition, Global, Greenhouse gas emissions, Housing, housing affordability, Housing prices, I. carbon absorption

Content in this bundle

• Iceland: Selected Issues; IMF Country Report No. 22/194; June 3, 2022
  • Iceland: Selected Issues; IMF Country Report No. 22/194; June 3, 2022 (Markdown version)
  • Iceland: Selected Issues; IMF Country Report No. 22/194; June 3, 2022 (PDF)