Iceland home prices soar 56%

[REYKJAVIK] Iceland's housing market has soared 56 per cent since its 2009 crash.

But one of the island's biggest investors says there's more to come, and isn't worried the price development might end in a bubble.

"There is a growing demand, and the market is going to be supported by a lack of supply for the next few years," said Gisli Hauksson co-founder and chief executive officer of GAMMA Capital Management Limited, an investment firm which manages more than US$1 billion in assets. He says lower interest rates will also help.

"Both real and nominal interest rates have been dropping quite fast in Iceland," Mr Hauksson said in an interview in Reykjavik. The central bank is due to announce its next rate decision on Wednesday. It cut the benchmark 7-day term deposit rate by a quarter of a percentage point, to 4.25 per cent, last month.

After its 2008 economic meltdown, real house prices in Iceland fell by a third in the space of two years.

But the island's meteoric recovery has drawn investors' attention, especially since the central bank exited capital controls this year. After contracting about 7 per cent in 2009, the economy grew more than 7 per cent in 2016. Growth is being driven by booms in tourism and construction.

In the housing market, the central bank says Airbnb Inc. is helping drive prices higher. It recently cited a "surge in short-term private rentals," with the number of listed flats in August up almost 65 per cent from a year earlier.

The central bank says house prices are unlikely to drop as long as the lack of supply continues.

"The outlook is for a continued housing shortage for a while yet, although it could subside in the next two years," it said last month. "Most signs indicate that demand will continue to grow, which will contribute to further price increases, other things being equal." Mr Hauksson says Gamma has recently bought a developer for residential housing, and plans to build around 4,000 houses over the next half decade. He wants to list the company on the stock exchange next year.

BLOOMBERG