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ISK gathering steam
 The exchange rate of
the Icelandic króna (ISK) has risen by 10.8% in a single year, and 17.6%
from its post-crisis trough at year-end 2008. It is now 5.6% above last
year's average. At around this time last year, the euro and the US dollar
were trading at 182 and 128, respectively, whereas the two currencies are
now trading at 157 and 121. Therefore, by this measure, Icelanders are in
a slightly better position than before, although purchasing power is still
limited compared to the period before the currency crisis. The ISK has
depreciated by about 47% since mid-2007, when the euro cost ISK 84 and the
US dollar ISK 62.
The real exchange rate in terms of relative unit labour costs was 7.2%
higher year-on-year in Q/2010, according to newly published figures from
the Central Bank of Iceland (CBI). The real exchange rate measured by this
criterion reveals how wages are developing in comparison with wages in
Iceland's main trading partner countries, measured in the same currency
and adjusted for developments in productivity. The increase since Q2/2009
is somewhat larger than can be explained by the ISK appreciation alone, as
wages have risen more rapidly in Iceland than in its trading partners
during the period, even though the pace of wage increases in Iceland has
slowed down considerably since the banks collapsed. As a result, wage
earners are in a somewhat better position by this measure than they were a
year ago, and in comparison with wage earners in trading partner
countries. The situation is somewhat poorer than before the crash,
however, as the real exchange rate in terms of relative unit labour costs
was 40% lower in Q2/2010 than in Q2/2007. In view of this factor and
mounting unemployment, it is understandable that labour has flowed out of
the country during the period. On the other hand, the domestic labour
force is now much more competitive in terms of wage costs, which is
helpful to exporters and other domestic firms in the tradable sector. This
is particularly true of labour-intensive operations.
Another measure of competitiveness is the real exchange rate in terms
of relative consumer prices. This criterion can be used, for example, to
assess developments in domestic price levels in comparison with Iceland's
chief trading partners, measured in the same currency. Although the real
exchange rate has risen by over 17% since it bottomed out after the
crisis, in Q2/2010 it was still 33% lower than in Q2/2007. The real
exchange rate in terms of relative consumer prices remains well below
long-term averages, and far from a level that would ensure equilibrium in
external trade. In view of this, there appear to be grounds for the
assumption that the real exchange rate will rise in the near future. How
much it rises and how long it takes to achieve this equilibrium cannot be
predicted with any certainty, however.
Rent
rises
  According to a new
survey carried out by the Consumers' Union of Iceland, rent has risen in
the greater Reykjavík area since the beginning of the year, with the
increase ranging up to 17% for the largest flats advertised. The survey
revealed that five-room flats were advertised for rent at an average price
of ISK 1,253 per m2 in July, as opposed to ISK 1,066 in February. Thus an
average 160 m2 flat costing ISK 170,000 per month in February now costs
ISK 200,000, an increase of 17%. Rent on studio apartments rose by 7% over
the same period, while three-room and four-room flats rose by 4.5% and 4%,
respectively. On the other hand, rent on two-room flats declined by about
2% during the period. The flats covered by the survey were advertised for
rent by Iceland's major rental agencies and were all on the open market.
The Consumers' Union of Iceland has studied rental prices on a regular
basis over the past two years and has found that rent is now higher than
in April 2008, when the first survey was taken.
Demand for
rental property remains strong
Rental agreements are commonly
indexed to the CPI, which means that rent prices rise in line with general
price levels. The general price level has risen by only 1.3% so far in
2010, however, and therefore explains only part of the increase in rent.
The law of supply and demand probably makes some impact here, as demand
for rental housing has exploded since the crash. According to the National
Registry of Iceland, 4,565 rental agreements were concluded during the
first six months of the year, an increase of 86% over the same period in
2008. Demand for rentals was particularly strong in 2009. It has retreated
somewhat once again but remains brisk; for example, 834 residential rental
agreements were registered in June 2010, almost 24% more than in May and
3% more than in June 2009.
Housing market much healthier
than before
 In view of economic
conditions and the recent situation in the rental housing market, it is
quite appropriate that many consumers should choose to rent rather than
buy. Housing market turnover has shrunk by as much as 80% since the crisis
struck, and prices are down nearly 40% in real terms from their peak in
early 2008. In the past few months, however, housing deflation has slowed
down substantially. According to Statistics Iceland (SI), real house
prices in Iceland have fallen by 2% thus far in 2010, after declining by
10% in 2009. Prices have been quite volatile in recent months, and
purchases have been sparse. In fact, the market could begin soon to tempt
potential buyers who have waited out the storm: interest rates are much
more palatable than before, prices are down sharply since the collapse,
rent has risen in the recent term, and the first signs that the recession
has hit bottom are beginning to surface. The chief hindrances in the
housing market at present are expectations of further price drops and
delays in restructuring of household balance sheets. The residential real
estate market is unlikely to recover to any marked degree before household
financial restructuring is complete, the employment situation has improved
further, and uncertainty about future household income has been reduced.
|
|
| OMX ICEX, 7/28/2010 |
| Category |
Volume |
| Bonds |
43 |
| Equities |
8,622 |
| Total |
8,665 |
| REIBOR Market, 7/28/2010
|
| Term |
REIBID |
REIBOR |
| O/N |
6.50% |
7.00% |
| SW |
6.50% |
7.00% |
| 1M |
7.10% |
7.50% |
| 3M |
6.80% |
7.05% |
| 6M |
6.35% |
6.70% |
| 12M |
6.10% |
6.35% |
| Exchange Rates, 7/28/2010
|
| |
pr.ISK |
3m.Libor |
3m.fwd. |
| USD |
120.06 |
0.47% |
1.9 |
| GBP |
187.75 |
0.74% |
2.9 |
| JPY |
1.38 |
0.24% |
0.0 |
| EUR |
157.00 |
0.83% |
2.4 |
| Vt. ISK |
212.19 |
0.85% |
3.2 |
| Currency Crosses, 7/29/2010
|
| |
EUR |
GBP |
USD |
| GBP |
0.836 |
|
|
| USD |
1.308 |
1.564 |
|
| CHF |
1.362 |
1.629 |
1.042 |
| JPY |
113.966 |
136.288 |
87.152 |
| NOK |
7.958 |
9.517 |
6.086 |
| SEK |
9.452 |
11.303 |
7.228 |
| Icelandic Equities,
7/28/2010 |
| ID |
Vol. |
Yield |
Day.ch. |
| MARL |
35 |
96.30 |
-0.72% |
| OSSR |
8 |
198.50 |
1.79% |
| FO-EIK |
0 |
83.40 |
0.00% |
| ICEAIR |
0 |
3.50 |
0.00% |
| FO-AIR |
0 |
117.00 |
0.00% |
|
|
