Too Little, Too Late: Iceland’s Shambolic Housing Market

In the afternoon of June 25, 2020, a house on Bræðraborgarstígur in Reykjavík’s Miðbær neighbourhood was set ablaze. Smoke engulfed the western part of town and a majority of the downtown area, pooling over the city pond where warm air met cool water. One of the most fatal fires in Reykjavík, three people lost their lives and several others needing hospital care.

When first responders arrived, they noticed faces in the upstairs windows, desperately searching for a way out. The sole exit was a staircase in the process of burning down. Panicking, the people broke their windows, opting to jump from the second storey and risking the consequences of blunt trauma rather than burning inside. Two people died as a direct result of the fire. A third person died from the second storey fall.

There were no balconies to climb down, escape routes were lacking and fire extinguishers were outdated.

Following an assessment of the building, it was clear that necessary fire safety arrangements were not in place. There were no balconies to climb down, escape routes were lacking and fire extinguishers were outdated. A rough estimate of the number of inhabitants counted 15-20 people, most of whom were of foreign origin — living, studying and working in Iceland. Following an investigation, Marek Mozczynski, who lived there, was trialled and convicted of arson. Marek was declared not criminally responsible and sentenced to high-security psychiatric care.

Living in a modified building with lacklustre safety precautions, the tragedy might have been prevented had there been a stricter legal frame governing these types of accommodations. At the time of the fire, the Bræðraborgastígur property was one of several buildings leased out by company HD Verk, which offered makeshift industrial buildings for people to live in. Approximately 70 inhabitants were registered at the address which did not match reality, given its size and signs of habitation.

Decimated by the fire, the house was later torn down by authorities. The emptiness of the lot serves as a sad reminder of the state of housing affairs in the capital area.

Although the Bræðraborgarstígur fire was the most fatal of fire incidents happening in these types of over-occupied, exploitative housing facilities, it isnot an outlier. Another fire broke out in October 2023 on Funahöfði in Reykjavík’s industrial Höfðar neighbourhood, claiming one life. In Hafnarfjörður, an industrial building housing up to 17 people on Hvaleyrarbraut was engulfed in flames in August 2023. Miraculously, no one was injured.

The fatal incident at Bræðraborgarstígur and the relatively quick succession of similar events served as a serious wake-up call for Icelandic society. At Bræðraborgarstígur, people flocked to the ruins to pay their respects, highlighting the distinction Icelandic society makes between those who are born here and those who are not.

Economical death traps

The residences at Bræðraborgarstígur, Funahöfði and Hvaleyrarbraut are referred to as “óleyfisíbúðir” — “non-registered apartments” in industrial or commercial spaces housing people. Needless to say, these types of buildings are not designed for human habitation, exposing the residents to life-threatening safety hazards.

[It’s] a way paved by good promises from state and municipality. They need to pull up their pants and deliver.

Soon after the 2020 fire, a collaborative effort among the capital region fire brigade (SHS), Icelandic Confederation of Labour (ASÍ), and the Housing and Construction Authority (HMS) was implemented. Its purpose was to map out the number, locations and status of fire safety in non-registered apartments in the capital region.

A 2017 survey conducted by SHS showed an estimate of between 3.500 and 4.000 people living in non-registered apartments. Detailed information extrapolated by SHS’ surveys in 2022 show the number dropping, with 1.868 people living in these types of buildings. Following safety inspections, it was concluded that approximately 55% of residents lived in places with sufficient fire safety precautions.

According to SHS’ inspectors, whose findings were published in a report, there was not always a correlation between fire safety standards and living conditions. Well-kept housing might have non-existent fire regulations, and vice-versa.

One inspection described a living situation where 30 people had access to two functioning toilets.

The worst conditions witnessed by the inspectors were in residences where foreign labourers were housed, often after being brought to Iceland by temporary work agencies operating muddy “work-to-live” schemes. In many of these scenarios, the employees are dependent on their employer to provide housing.

One inspection described a living situation where 30 people had access to two functioning toilets. These tenants paid 60.000 ISK (400 EUR) for a shared room.

“It’s a huge problem,” says VR union board member and former ASÍ housing specialist Bjarni Þór Sigurðsson, commenting on the situation facing tenants. “There’s a massive shortage of housing.”

In most cases, non-registered apartments seem to be the last resort of people needing a roof over their heads. While the vast majority of tenants in these types of housing live there out of necessity, there are some cases where people choose to live in alternative arrangements separate from the conventional housing market.

“People are dying in these apartments. Burning inside. That’s the problem,” Bjarni states blankly.

What’s the deal with the economy?

The potentially life-threatening living conditions imposed on those in need are the results of a seemingly non-existent national housing policy in this country.

In fact, the 2023 Housing Greenbook published by the Ministry of Infrastructure freely admits to this, stating: “Up until now, policy-making in housing and construction issues have not been issued in a comprehensive manner, with housing laws and actions being shaped out of a necessity to react to housing conditions each given time.”

The best thing we can do for citizens of Reykjavík is to build more. This is a relatively simple law of supply and demand.

Iceland is not an outlier. Many international cities are facing housing shortages. In a nutshell, Iceland’s difficult housing situation results from localised caus. The expansion of the country’s tourism industry has put strain on various infrastructure. The gold rush of tourism has led to large-scale acquisition of available housing by investors, whose vision is clouded by dollar signs. The rapidly expanding industry demands more workers than the domestic population can sufficiently supply, meaning the import of foreign workers to fuel the tourism sector, all needing a place to sleep.

Additionally, the country’s volatile currency and economic status exacerbates the problem. Regularly faced with high inflation, Icelandic mortgages are tied to hefty interest rates.

The government’s policy document is among the several steps towards a healthier housing market and lays the groundwork for housing solutions for the next 15 years. Coupled with the master housing agreement signed in 2022 by the Ministry of Infrastructure, HMS, the Icelandic Association of Local Authorities, and representatives of various municipalities, these government actions are meant to increase housing stability by pledging to construct 35.000 apartments in the next 10 years. Additionally, 30% of all new developments should be devoted to affordable housing, with an additional 5% devoted to social housing.

According to Bjarni, this isn’t going according to plan. “We’re not on the right track. 4.000 apartments need to be built per year. This year, we’re talking about less than 2.000,” he says, adding that there’s a cumulative housing need growing since before the 2008 financial crisis. “So, it really needs to be more than 40.000.”

“There’s a lot of decline in the construction of new builds, which means that construction companies have been staying put.”

Director of HMS’ housing division Elmar Erlendsson agrees. “There’s a lot of decline in the construction of new builds, which means that construction companies have been staying put, haven’t started projects, because of the risk that they won’t be able to sell those apartments.”

“It’s very strange,” he continues, “because at the same time, there’s an increased need. Immigration and population increase has been way over estimates. We’re breaking records annually. It takes a certain amount of time to construct new housing which will result in a sort of a gap in the next periods of time, so fewer apartments will enter the market.”

In accordance with the master agreement, the City of Reykjavík set a goal of constructing 16.000 apartments in 10 years. Though work began on only 690 apartments in 2023, ground was broken for another 675 apartments in the first half of 2024 — figures that have Mayor of Reykjavík Einar Þorsteinsson feeling optimistic.

“In the first half of this year, we’ve seen things are on the mend. There are many factors at play, possibly the fact that construction parties cannot wait too long with their equipment unused. But also the fact that we’ve started large projects,” he ruminates from his mayoral office overlooking Tjörnin, Reykjavík’s central pond.

According to Elmar, the primary driver of the housing shortage are high interest rates. As the national economy heated up with increased consumer-spending post-covid, the Central Bank of Iceland was tasked with tackling a rapidly growing inflation rate, which peaked at 10.2% in 2023.

Mayor Einar agrees that economic factors play a big part in the current housing situation. “It’s a big challenge to accelerate housing construction in an environment where external factors are influential. We’re not building this ourselves. We just sell the lots and distribute them. And it’s in the hands of the companies to go ahead. When a blow happens to the economy, we have few resources to move things.”

“It’s a big challenge to accelerate housing construction in an environment where external factors are influential.”

Attempting to inhibit consumer-spending and cool things down, the Central Bank took to increasing its key interest rates. While lowering inflation into a more manageable 5.8% (since June 2024), the rising key interest rates have resulted in increasingly unfavourable developer loans, mortgages and rent prices. Since late 2020, the National Bank’s key interest rate gradually rose from 0.75% to the current 9.25%.

Diverging opinions on what seems to be the influencing factor were voiced in two separate conversations. “To ensure stability in the housing market, there needs to be an equilibrium in supply. There, I want to point out that a shortage of lots has been a problem. It needs to be ensured that there’s an enough supply of lots,” says Elmar.

But the mayor prefers another term than blaming it on a shortage of construction-ready lots. “I would say there’s a housing shortage. Because we know there’s a surplus demand for apartments. Today, it’s possible to start building 2.500 apartments in Reykjavík on construction-ready lots.”

Despite the supposed poor effort of producing enough supply, there’s an ironic atmosphere of optimism sensed in the various policy documents and agreements. Every governing body seems to be on the same page in terms of the need for increased accommodation.

“We’re moving closer [to a consensus] and everyone agrees on the importance of having a constant supply of new apartments and the things we really need to do. But oftentimes, there are other forces in our economy which move against it,” says Elmar.

Short-term rentals, long-term problems

In conjunction with the unfavourable economic conditions of Iceland, the impact of the tourism industry on the housing market cannot be overlooked. Bringing both employees to work jobs in the industry and the tourists themselves to the country, its sector has long been ignored by both state and municipality.

Since 2022, Iceland’s population increased by roughly 5.1%. In 2023 alone, 2.2 million people visited Iceland — almost six times the domestic population.

“The people working around the [tourism] industry need housing, of course. We also need information on how people want to live. More often than not, they’re looking for the most economical alternatives,” Elmar comments. “We need ways to know how these people want to live and this connects to accommodation in non-registered housing. We need to increase the number of residential options and have a variety of options.”

While the number of hotel rooms in Reykjavík is meticulously documented, sufficient data is lacking on the number of short-term rental apartments available to tourists. “Of course the tourists play a role. There’s a question of how they want to stay. Do they want to stay in a hotel or in an apartment? But data on Airbnb and short-term rentals isn’t sufficient or reliable. So we haven’t reached a consensus in that discussion,” Elmar claims.

Apartments are an investment, which is an idea we need to unwind.

In early 2024, Minister of Tourism Lilja Dögg Alfreðsdóttir announced a new bill aimed at cracking down on short-term rentals. Passed in April, the new legislation introduces a 90-day cap on short-term rentals in residential zones. Apartments leased for a longer period must have a commercial permit. Opposing views have pointed out that the law does not apply retroactively — something the parliament committee amending the bill denied on the grounds of vocational freedom — and did not free up existent housing.

According to the June housing report published by HMS, the number of short-term rentals in the capital area numbered 2.500, with about 980 of them leased out for longer than 90 days.

In recent years, cities across the world have decided to suppress the availability of short-term housing due to its effects on local housing markets. Most recently, and perhaps most aggressively, is the case of Barcelona, whose authorities announced the phasing out of short-term rentals entirely by 2029. Today, about 10.000 rentals are in a city of 1.62 million people.

According to Mayor Einar, his position is very clear. “The best thing we can do for citizens of Reykjavík is to build more. This is a relatively simple law of supply and demand. The population increased by 2.9% in the last year, which is one of the highest growth rates of European cities. The housing need is tremendous, so the only way to reach an equilibrium on the housing market is to accelerate construction.”

While Mayor Einar isn’t wrong about the need to accelerate construction, it’s worth pointing out that it’s hard to apply the golden rule of economics to such a colossal phenomenon that housing is. Even if the national construction estimates of building 35.000 to 40.000 apartments were met tomorrow, there are limited rules in place to stop deep-pocketed investors from scooping up the entire stock.

According to data compiled by HMS, approximately 37% of all apartments in Iceland are owned by individuals or private parties owning more than one apartment. Despite the insufficient information on short-term rentals, HMS’ Elmar points out that these ownership rates paint a rather bleak picture.

“There are clues that many of the apartments constructed in recent years have been purchased for this function — not gone to the people who need them and will live in them,” Elmar explains. “So apartments are an investment, which is an idea we need to unwind — shopping with people’s homes. I think that most around us have realised that the market doesn’t fix the housing problem. There needs to be some type of intervention from the government to ensure housing for everyone,” Elmar states. “In our minds, that’s the key tool in order to offer affordable financing for those who need it, whether renting or owning.”

The unions’ par

While it’s unlikely that the state of housing affairs will be transformed overnight, there are actors in the business of leveling the playing field. In addition to being heavily involved with the labour movement, Bjarni Þór also chairs the representative board of Bjarg, an affordable housing association managed by labour unions ASÍ and BSRB, the federation of public worker unions in Iceland. Based on a similar arrangement as in the Nordics, Bjarg supplies long-term housing to low-income families.

Operating within the public housing system installed in 2016 (“when everyone was in France watching Iceland compete in football,” Bjarni chimes), these non-profit housing associations have a portion of their financing secured through state and municipal disbursements.

While the main focus on affordable housing schemes such as Bjarg and its sister association Blær are on providing rentals, Bjarni emphasises the need for increased variety in living arrangements. “I believe we need to establish a social housing ownership system,” he confesses, evoking the 20th-century social and labour housing system colloquially known as “verkamannabústaðakerfið” which he referred to as being sold.

I don’t trust politicians, municipalities, nor the state to run this type of system. I trust the labour movement and the unions.

Cancelled at the turn of the century during waves of government privatisation, the scheme ensured the construction of affordable housing for low-income individuals. Reykjavík’s Breiðholt neighbourhood was largely built through the system, as were the emblematic grey blocks of low-rise houses on Hringbraut.

The strict union man he is, Bjarni is sceptical about the powers that be. “If [the master housing agreement] works, I am optimistic. But it takes time,” Bjarni says. “We had a labour housing system which was sold. I don’t trust politicians, municipalities, nor the state to run this type of system. I trust the labour movement and the unions. [It’s] a way paved by good promises from state and municipality. They need to pull up their pants and deliver. Especially on the master agreement.”

Even with the efforts of the labour movement, there’s still more work to be done. “The situation is that — now I’m only talking about Bjarg,” he stresses, “There are 4.000 people on the waiting list

Another solution Bjarni and the labour movement have examined is the construction of temporary housing units. Although a tentative idea at this stage, it would alleviate some pressure of the housing market. More importantly, it could quickly house those living in precarious situations.

In the midst of this standoff that is the housing market, some work has started to increase the security of people living in non-permitted housing. In late 2023, Minister of Infrastructure Sigurður Ingi Jóhannesson introduced a bill which should review current legislation, possibly permitting temporary residence in industrial and commercial spaces.

However positive these changes might be, fixing the housing market takes time. In the meantime, thousands live in unsafe conditions; others are stuck in the brutal gridlock of paying high rent or endlessly saving for ever-growing down payments, while investors continue to hoard homes that people very much need.

For the victims of Bræðraborgastígur and Funahöfði, efforts to rectify the shambolic housing market are too little, too late.