Rising interest rates challenge first-time homebuyers in Reykjavik

Rising interest rates and tighter lending conditions have made it increasingly difficult for first-time homebuyers to enter the real estate market, as noted by economist Ólafur Þórisson from the Housing and Construction Agency. He observed that necessary repayments—particularly for indexed mortgages—are now approximately 70% higher than they were at the beginning of 2020, resulting in fewer young buyers being able to afford homes.

Additionally, around 19% of properties in the capital region are currently selling above their asking price, a figure significantly higher than the typical 10% expected in a balanced market. Ólafur pointed out that aside from the impact of high interest rates and stricter lending criteria, financially strong buyers are also able to overbid on homes that first-time buyers are trying to purchase. This situation puts initial buyers at a disadvantage against larger investors and entities.

Due to the trends in interest rates and inflation, first-time buyers now need considerably higher incomes to manage loan repayments. More homeowners are also turning to indexed loans. The Housing and Construction Agency reports an increase in late payments, though there is little sign of widespread payment difficulties as many households are still managing. However, with a large portion of fixed-rate, non-indexed loans set for renewal next year, conditions may worsen as rates exceed 4% and non-indexed loans reach around 11% currently. The upcoming reviews of these loans are expected to significantly increase repayment burdens, pushing these borrowers toward indexed loans to cope with payments.