Iceland’s Home Price Appreciation Is Positive for Housing Finance Fund

Iceland’s Home Price Appreciation Is Positive for Housing Finance Fund

On Tuesday, the Icelandic property registry, Registers Iceland, published its property price index for 2011. The index shows a 10% increase in real prices in the greater Reykjavik area over the year, after a flat market in 2010 and price declines in 2009 and 2008. The turnaround in the housing market is credit positive for the Housing Financing Fund (HFF, Baa3 negative) because it increases the value of the collateral backing its loan portfolio. However, HFF’s stock of repossessed properties remains high. Should HFF resort to a non-orderly sale of repossessed properties, it would renew pressure on property prices and reverse the positive trend.

HFF is a residential mortgage lender fully owned by the Icelandic government (Baa3 negative). It provides 62% of the country’s mortgage credit. During Iceland’s economic and banking crisis, which began in 2008, HFF continued lending, but a considerable share of its mortgage book was affected by payment suspensions and defaults (16% as of June 2011), and more than half its portfolio was restructured. HFF’s stock of repossessed owned properties as of end-September reached 1,419, its highest level to date, versus an average monthly property market turnover of 360.
HFF booked net losses in 2008-10. In addition, operating expenses have increased considerably in recent years, up to ISK617.6 million at end-June 2011 from ISK429.8 million at end-June 2010 and ISK366 million in June 2009, which reflects the increased cost of managing indebted homes and appropriated assets. The fund’s weak performance and its low 2.3% capital ratio below the 5% target increases pressure to realise the value of its stock of repossessed properties.

Between 2008 and 2010, real property prices declined by 15% in the greater Reykjavik area (13% nationally), according to Registers Iceland. During 2011, real prices increased by 10% in the capital and by 8% nationwide (see exhibit below). However, residential sales remain low, and turnover based on the number of purchase agreements in the greater Reykjavik area during the first 11 months of 2011 was 3,948, compared to 9,082 in 2007 when the property market was at its peak. During 2010, only 2,729 properties were sold in the capital area, which represented nearly 60% of the Icelandic property turnover.

HFF has managed repossessed properties in different ways. In the first half of 2011, the fund repossessed 388 properties and sold 80 properties. As of end-June 2011, 42% of properties owned by the fund were rented out, typically to the previous owners. Finally, HFF intends to set up a subsidiary to manage income-earning rental properties.