20220626-IMF-Iceland_Selected_Issues_34页_717kb

Summary of the Selected Issues Paper on Iceland

Core Content

This document provides an analysis of key issues facing Iceland's economy, focusing on housing market risks and affordability and climate policy challenges. It outlines the current state of the housing market, systemic risks, and policy responses, as well as the country's path toward carbon neutrality, including its approach to energy exchange and carbon absorption.

Housing Market Risks and Affordability

Main Issues

• Surging House Prices: House prices in Iceland have risen sharply since the start of the pandemic, driven by increased demand due to remote work, low interest rates, and loose credit standards. Supply constraints, including economic stagnation and supply chain disruptions, have exacerbated the mismatch between supply and demand.
• Overvaluation: Real house prices have exceeded macroeconomic fundamentals and long-term trends, with a 20% increase from end-2019 to April 2022. Ratios of house prices to income and building costs have surpassed pre-GFC levels and are higher than in peer countries.
• Systemic Risks: High household debt (84% of GDP by end-2021) and overvalued housing can lead to a negative spiral if house prices correct. The structure of variable and indexed mortgages increases the risk of default and financial instability.
• Amplification of Economic Cycles: House price cycles are closely linked with the business cycle, particularly with private consumption and residential investment. A housing price shock can significantly impact economic activity through wealth and income effects.
• Affordability Concerns: Housing costs account for nearly 30% of disposable income in Iceland, with the lowest-income households spending up to 35%. The housing cost overburden rate is among the highest in the OECD, with over 16% of the population spending more than 40% of their income on housing.
• Supply Constraints: The number of new residential buildings dropped sharply after the GFC, contributing to price increases. Despite some recovery, the housing output per 1000 inhabitants declined from 2011 to 2020.
• Tourism Impact: The recovery of tourism could increase demand for rental housing and push up prices, especially as more apartments are converted to short-term rentals.

Policy Recommendations

• Monetary Policy: Tightening monetary policy can help reduce house price pressures and stabilize inflation expectations.
• Macroprudential Measures: Tightening borrower-based measures such as LTV and DSTI can help contain systemic risks. Recalibrating DSTI regulations and introducing a debt-to-income (DTI) cap may improve effectiveness.
• Targeted Assistance: Public housing allowances should be more targeted toward low-income households to improve affordability.
• Phasing Out Homeownership Incentives: Policies such as mortgage interest deductions are regressive and should be gradually phased out to avoid distorting the market.
• Social Housing: Social housing can help address affordability issues where supply is inelastic, but it should be transparent and portable to support labor mobility.
• Supply-Side Reforms: Simplifying planning regulations, reducing administrative burdens, and streamlining building permits can increase housing supply and reduce costs.
• Long-Term Strategy: Structural reforms to reduce construction costs and increase supply are likely to have the highest pay-off in the medium term.

Climate Policy and Carbon Neutrality

Key Objectives

• Ambitious Climate Goals: Iceland aims to achieve carbon neutrality, which will require significant technological and policy advances, especially in the energy and transportation sectors.
• Energy Exchange and Carbon Absorption: Iceland is exploring the use of energy exchange and carbon absorption to meet its emissions reduction targets. These efforts are crucial for reducing emissions both under and outside the European ETS.

Challenges and Strategies

• Clean Fuel Development: Iceland has the lowest energy generation emissions in the OECD but needs to improve in other areas. The country is behind in clean fuel adoption compared to other OECD nations.
• Carbon Pricing: Uniform carbon pricing policies are essential for achieving climate goals. This includes aligning with the European ETS and promoting clean energy production.
• Renewable Energy Expansion: Increasing renewable energy production, particularly in the energy exchange sector, is necessary but raises environmental concerns.
• Fiscal Incentives: Fiscal policies to reduce emissions should be revenue-neutral and aligned with other economic objectives.
• Carbon Sequestration: While promising, carbon sequestration is not yet economically viable in the short run. Continued research and development are needed.
• Policy Tools: The Climate Policy Assessment Tool provides insights into the effectiveness of various policies in reducing emissions and achieving carbon neutrality.

Key Metrics and Data

• House Price Growth: Real house prices increased by 20% from end-2019 to April 2022.
• Debt-to-Income Ratio: DSTI limits were introduced at 35% (40% for first-time buyers) in 2021.
• Housing Affordability: Housing cost overburden rate is among the highest in the OECD, with over 16% of the population spending more than 40% of their disposable income on housing.
• Energy Emissions: Iceland has the lowest emissions in energy generation in the OECD, but needs to reduce emissions in other sectors.

Conclusion

The paper emphasizes the importance of well-coordinated macroeconomic and financial policies to manage the housing market and improve affordability. It also highlights the need for targeted and effective climate policies to achieve Iceland's carbon neutrality goals. The interplay between these two areas is critical for long-term economic and environmental stability.