House prices fall further in hard-hit Iceland

The house prices index in Iceland dropped 7.56% (-13. 98% in real terms) over the year to end-Q1 2010, according to Statistics Iceland. However Iceland’s house price falls are moderating (-8.44% fall during the year to Q4 2009, and -12.54% fall y-o-y to Q3 2009). Iceland’s GDP contracted by 6.9% over the year to Q1 2010.

The average square meter price of new dwellings was down to 224,969 kr. (US$1,756) in Q1 2010, from 226,318 kr. (US$ 1,850) last year, according to the Real Estate Registry of Iceland. A more pronounced decline was experienced in Reykjavik, the capital city, where average square meter prices fell to 228,099 kr. (US$ 1,780) in March 2010, from 247,387 kr. (US$2,022) in March 2009.

Iceland’s house prices started falling in October 2008, when the Central Bank raised the key policy rates by 500 basis points to 18%. The hike was implemented to stabilize the Krona, and was one of the International Monetary Fund’s conditions for granting a US$2.1-billion loan, which was sought when Iceland’s three major banks all collapsed in the span of one week.

In 2008, Iceland’s external debt ballooned to 14.34 trillion kr. (US$118.7 billion), up by 93% from a year earlier. It further rose to ISK15 trillion (US$120.4 billion) in 2009. These debt figures are huge compared to Iceland’s GDP of 1.47 trillion kr. (US$12.2 billion) in 2008 and 1.5 trillion kr. (US$12 billion) in 2009.

Recovery will not happen in 2010. Although the policy interest rate was lowered to 8.5% in June 2010, house prices are expected to continue falling this year, though more slowly. The Statistics Iceland estimates a 27.8% housing investments drop in 2010. GDP will contract by 2.9% in 2010, before expanding 3.2% in 2011.