Iceland’s tourist influx is creating housing problems

a crowd of people at iceland's hot springs

Crowds of people pictured in Blue Lagoon, Grindavík, Iceland. Sergio Pitamitz/VWPics/Universal Images Group via Getty Images

Iceland’s glorious mountains, hot springs and glimpses of the Northern Lights have made it a bucket-list destination for tourists across the world. But like many Instagram-famous locations, it has found itself in a trap: how to cater to visitors while maintaining living standards for locals.

Visitor data is evidence of Iceland’s meteoric rise to a travel hotspot. Between 2021 and 2022, there was a 146% jump in foreign visitors and last year the number of tourists outpaced Icelandic residents nearly six-fold, according to Bloomberg

But as travelers continue to flock to Iceland, boosting its economy and creating new jobs, it has also left nationals out in the cold in an increasingly hot housing market.

Increased tourism, which accounts for about 6% of Iceland’s GDP, has meant a greater demand for workers and therefore, a greater need for housing.

In January 2023, the country’s population was up 3% year-over-year marking the largest increase since 1734, according to official body Statistics Iceland.    

As a result, residents are now encountering smaller, more expensive and poorly maintained apartments in and around the capital Reykjavik, Bloomberg reported Wednesday.

Several homes have also been converted into Airbnb accommodations to meet the growing influx of tourists. Homestay licenses increased 70% last year compared to a year ago, Bloomberg reported citing data from AirDNA. 

In a bid to improve the supply of housing, Iceland’s government kicked off a housing policy last year with a plan to build 4,000 apartments a year for the coming five years.

However, the government has fallen short of its yearly target and is seeing the affordability issue compounded by an interest rate of 9.25%, well above what many European countries have set.

“Tourism has been creating inflation and the general wage earner is paying for it,” Finnbjorn A. Hermannsson, who serves as president of the Icelandic Confederation of Labor, told Bloomberg.

Iceland’s complicated relationship with tourism

The problems associated with tourist influx aren’t new to Iceland.

Since its boom over a decade ago following the collapse of its banking system in 2008, tourism has helped Iceland’s economy stay strong and kept unemployment low.

As well as finding itself in many social media threads, the popularity of TV series ‘Game of Thrones’—which featured scenes flaunting Iceland’s landscape—also prompted more tourism. At the same time, housing shortages have gradually gotten worse. 

“The rapid growth of tourism has given rise to discussion of the crowding-out effect from the sector and whether the increase in tourist numbers should be limited with higher fees and taxation,” a 2023 Financial Stability report by Iceland’s Central Bank said.

It found that tourism was driving jobs growth in the country amid economic challenges, but has also hampered the housing market. 

“The tourism boom has therefore contributed to low unemployment and put considerable pressure on other infrastructure, including the housing market, as a majority of tourism employees are foreign immigrants.”

Housing prices have shown some signs of tapering in 2023, although it could face worse conditions with visitor numbers estimated to hit 2.5 million in 2026 from last year’s 2.2 million.   

Portugal’s rodeo with high housing prices

Other European countries have also seen the impact of tourism—or in Portugal’s case, digital nomads—spark a housing crunch.  

Rents and house prices have surged in Portugal following a tide of policies that encouraged foreigners to invest in the country, such as its “Golden Visa” program which helped draw in wealthy ex-pats.

Tourism also makes up a central part of its economy, and the conversion of apartments into Airbnbs aggravated the housing problem. High rents, inflation and low wages have resulted in locals reportedly being priced out of the market. 

Last year, Portugal moved to stop issuing new licenses for short-term rentals and also scrapped the “Golden Visa.” Despite the government’s efforts though, house prices have remained elevated above the likes of Milan and Madrid.

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