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The property market in Iceland is on the verge of another bubble

Prices of new homes jumped 40 percent in the first quarter compared to the previous

The property market in Iceland is on the verge of another bubbleThe recent measures for crisis management applied by the authorities in Iceland paved the way for the next bubble in the local real estate market less than four years after the banking collapse threw the economy of the North Island in the worst recession in its history, writes Bloomberg.

Prices of new homes reached record levels during the past quarter, grew by 40.1 percent compared to the level from the last three months of 2010, according to the National Property Registry of Iceland in Reykjavik.

Average house prices have risen with 11.3% since the end of 2009, when the market hit the bottom. The property market in Iceland is already showing signs of overheating. Experts warn that offshore investors hold nearly 8 billion Icelandic crowns (59 million dollars) and cannot withdraw them from the country.

It seems that the government has no intention to withdraw the foreign exchange control measures, introduced in 2008, before 2015. This directs funds to one of the few available long-term investment options - real estate.

Iceland, whose banking sector collapsed in 2008 and triggered a recession that lasted until the first half of 2010, now marked higher economic growth than Europe and the USA. Gross domestic product is expected to grow by 3% this year and 3.9 percent next year. According to Fitch Ratings, this recovery is largely due to non-standard crisis management applied by the country.

The revival of the island's economy is driven by household spending, economists say. From August onwards the Central Bank in Reykjavik has raised interest rates four times, as it is currently at 5.5%. Earlier this month, the bank warned that it takes stronger measures to cool the economy as inflation stays above the targeted 2.5%.

In the accelerated growth of inflation further strengthens the risks on the housing market, since most mortgages are tied to the CPI, which means that higher inflation causes heavier debt burden.

The average price of an apartment in Iceland in May was 28 million Icelandic crowns (€ 165,160) compared with 12.4 million Icelandic crowns (€ 73,143) in 2001, average household income of the island last year amounted of 4.4 million crowns (26 thousand euros).

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