House prices in Iceland hit record levels last quarter as crisis-management policies helped to create a property bubble just four years after the banking meltdown. According to the National Registry of Iceland, the price of new homes has shot up more than 40 percent since the end of 2010, with the average house price up 11.3 percent since the end of 2009.
Currency controls imposed after the banking crash in 2008 have prevented offshore investors from taking their money out of the country. The restrictions, which are set to remain until at least 2015, mean funds have been ploughed into the property market, which experts worry may overheat, sending mortgage prices soaring.
“If the development continues without interference, this will lead to a property bubble within the next two years,” Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma, said in an interview with Bloomberg. “There’s a greater risk of an asset bubble being created in an economy that is closed off behind capital controls.”
While euro zone economies are set to contract by 0.3 percent this year and expand only one percent next year according to the European Commission, Arion predicts that Iceland’s economy will grow three percent this year and a further 3.9 percent in 2013. Fitch Ratings also restored the country’s investment grade credit status in February, claiming Iceland’s “unorthodox” crisis management methods helped pull it out of recession.