12 November 2014

New working paper on housing market in Iceland 2003-2012

Ludvik Eliasson

Working paper no. 66. “Icelandic boom and bust: Immigration and the housing market”, by Lúðvík Elíasson has now been published. The paper discusses the large swing in the Icelandic housing market between 2003 and 2012.

A simple demand and supply model, based on the study by Elíasson and Pétursson (Working paper no. 29, subsequently published in Housing Studies), is fitted to data through the recent boom-bust period. The model does not capture fully the turbulence in housing market data for the period since 2003. The rapid rise in house prices during 2004 to 2007 is shown to depend heavily on the rate of net immigration. The subsequent drop in house prices is, similarly, in part explained by net emigration. The strong relation observed between migration and the housing market has previously not been detected in Icelandic data. The amplitude of changes in net immigration during the recent cycle is much larger than during the past decades. The apparent bubble in house prices between 2004 and 2007 can, therefore, largely be explained by fundamentals, such as changes in financing costs and accessibility of credit, as well as immigration.

The paper is accessible at the bank‘s website: Working papers