the icelandic bubble

E and I were on a Sunday drive around Reykjavík and some of the suburbs yesterday and noticed just how many new apartments and houses are being built on the outskirts of the Reykjavík area. In the town of Hafnarfjörður, for example, there is a vast area next to the Haukur athletic complex where a completely new neighborhood is being built from the ground up. It doesn't look like anyone is living in there yet, but looks as though it is designed to hold thousands of people. Outside of Njarðvík there is a sign proclaiming a planned development of over 800 new apartments. And that's not to mention the vast expansion of the city by the start of Route 1 at Heiðmörk. The sheer number of towering yellow cranes in these ground-up neighborhoods is unlike anything I have seen anywhere else in Europe or the U.S.

We couldn't help but wonder who exactly is going to live in all of these new places. Sure, Iceland is in a baby boom, but most of those little tykes aren't going to be able to sign a mortgage application anytime soon. And the government doesn't seem to be in a hurry to open the gates to a lot of new immigrants. Looks to me like this is a speculative boom fuelled by last year's mortgage rate cut by the three big banks (Landsbankinn, KB Banki, and Íslandsbanki) that dropped the lending rate to under 5%. Sure enough, house prices shot up to soak up the excess liquidity, and the real estate boom gathered steam.

The combo of the building boom and the lofty stockmarket here (the benchmark ICEX-15 is up 37% this year alone) reminds me a lot of the good-ole bubbilicious days of the late 1990s in the U.S. It was a lovely time while it lasted - who can really say "no" to first-class flights to Asia and 2-month bonuses? - but I remember how painful it was in the years following the bursting of the NASDAQ bubble. I can't help but wonder what will happen when the Icelandic bubble deflates.