Icelandic news translated into English

November 7, 2008

Predict 40% downswing in apartment prices

Filed under: economy — newsfrettir @ 12:29 am
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Central Bank of Iceland is predicting a 40% or more drop in property prices in the term of the prediction, which goes to the year 2011, and has then dropped in almost half from when the prices peaked in 2007. This is a bigger drop than in previous predictions from the Central Bank, as it is clear the economic crisis, increased inflation, worse financial situation of homes and evacuation of people will push the price lower than it would have else been.

If the prediction becomes a reality the downswing will be simiar as it was after the bank crisis in Finland in the nineties, from what the Central Bank states.

Predict the biggest downswing in private spending from the beguinning of readings.

Assumed 7½% drop in private spending in this year, and a quarter downswing next year. If these presictions become a reality this will be the largest downswing in private spending from the beginning of readings.

It is some more than avarage in some countries that have been through economic crisis, but downswings in the area of 10-18% have been common. It is not assumed that private pending will grow again until the middle of the year 2010 but then there will be a powerful growth stage that would be in harmony with the experience of other countries that have been through economic crisis.

So it is predicted that close to 10% growth of private spending the year 2011 and even more growth when looked farther down the road. Ratio of private spending from income does drop permanently in the prediction, that is, the ratio of savings will grow after great damage.

Capital position of homes worsen incredibly

It is assumed that homes will look to compensate with increased savings, as the international experience in financial crisis shows.

“The capital position of homes have worsen a great deal. The properties of homes without pensions were about 3770 billion króna in the end of second quarter of this year and had in the whole dropped a little from the beginning of the year. The worth of stocks and company holdings have crashed from the beginning of the year and individuals have lost parts of their belongings in money funds. Pensions of the nation have also lost large amounts.

“Additionally is a large drop in property worth this year and in the next years. The debts of homes were 1760 billion krónur in the end of the second quarter of this year and had increased by more than 200 billion krónur from the beginning of the year. A part of the increase can be traced to the devaluation of currency but in the end of June this year the currency-indexed loans were almost 18% of the total debts of homes to the loan system. The devaluation of the currency after that and with the bank crisis will cause permanent decrease in capital position of homes and increase their debt load, as well as job and income of many homes will drop,” according to Central Bank.

Very difficult situation of homes that have taken loans in foreign currency

Position of homes that have taken large foreign loans in the last year might become very difficult. The debt load of these homes have in some cases double, both because of the devaluation of the currency and higher interests, and the actual money have been depleted.

How many homes are having problems will be controlled in many ways by how much unemployment there will be and how long the currency will be this low, but nonpayment will increase and bankruptcy as well in the next months.

To prevent bankruptcy of the homes and companies that would survive under normal circumstances need to have their debts refinanced, from what Central Bank states.

The downswing in housing investments was already started before the financial crisis broke out, after 75% growth in the years 2002 to 2007. Suffering in loan markets, growing redundancy of houses, lowering of real estate prices and lowering of purchase power of wages was already apparent, according to Central Bank.

Reasons for practice broken

The bank and currency crisis is sharpening all the aspects of these matters. It can be assumed that the downswing of housing investments will be much more and prolonged than otherwise thought.

It is predicted that about third downfall this year and almost a quarter next year. As a clue of the downfall is that construction parties have returned a large part of the land that have been distributed the last year.

If the prediction will be a reality the ratio of housing investments of national productivity will be less than 3½% the next year which is substantially under the 6% average from the last four decades, but close to the ratio that was dominating in the economic low in the nineties.

Lately there have been big projects in building large stores, hotels and office houses. The jobs have already halted in some instances, as it is clear that the reasons for those projects are broken, and safe finance is no longer at hand. The construction industry will therefor end up in roughness as it commonly happens in times of depression and when there are signs of it,” says the Central Bank.

(News Article by Þorvaldur Örn Kristmundsson)
Original Article in Icelandic

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