The unintended consequences of novice players in Iceland’s real estate game.
Published in the 2007 autumn issue of Iceland Review – IR 45.03. By Greg Bocquet, photos by Páll Stefánsson.
The shower leaks. The floors are lumpy, uneven. The window frames are nicked. The front door has dents and scratches. And this is a brand-new house.
Oddfrídur Helgadóttir has been waiting for her house to be built for more than a year in the up-and-coming community of Vogar, a 20-minute drive west of Reykjavík. She was the first in the new neighborhood to buy and she will be the last to move in, well beyond the August 2006 deadline agreed upon in her contract.
Twenty years ago, few could have imagined the phrase ‘urban sprawl’ entering the Icelandic lexicon. But take one glimpse at the yellow cranes populating the city’s horizon and you will find an onslaught of office buildings and mid-rise condominium developments sprouting from the landscape. The problem is that the rapidly expanding housing market is becoming for some a nightmare of biblical proportions, with ineffective policing of the market leading to troubling stories of people’s housing dreams gone bad.
The inflation of property and housing prices in Iceland began in 2003, when the government’s Housing Financing Fund (HFF) raised its limits on maximum loan amounts. The banks followed suit and soon anyone with decent credit could get a loan for up to 100 percent of the value of a house or apartment at ludicrously low interest rates. In essence, the real estate market became nothing short of a homeowner’s Monopoly board. Rising incomes gave Icelanders more purchasing power, the need for a down payment disappeared and with monthly mortgage payments rivaling rent payments, people started to buy. In fact, they started to buy so fast and furiously that property transactions doubled between 2003 and 2007, according to market-wide statistics compiled by real estate agency RE/MAX.
But then came the complaints. Interviewed on the Icelandic National Broadcasting Service, Sigurdur Helgi Gudjónsson, chairman of the Association of Real Estate Owners, said that the number of disputes related to housing deals had tripled during the same period.
By law, homebuilders are not allowed to sell directly to buyers, or even to interact directly with buyers, but must use real estate agents as middlemen. The logic assumes that real estate agents, trained in assessing property values and drafting reliable contracts, ensure that apartments and houses are priced consistently and that neither party is taken advantage of. Furthermore, agents are not required to work only for the buyer or seller as in most other countries; rather they are expected to represent both sides of every transaction.
The problem, says Ingibjörg Thórdardóttir, director of the Association of Real Estate Agents, comes when “there are many unlicensed people without any of the required education who are posing as experts. That is where mistakes happen.”
As the present law stands, a licensed real estate agent may hire as many unlicensed sellers as he or she can afford to employ—a commonly exploited situation, says Thórdardóttir. There are approximately 150 licensed agents now working in Reykjavík, representing less than 20 percent of the roughly 800 people employed in real estate. In this respect Iceland lags behind its Scandinavian brethren. In Sweden, for example, a full 80 percent of those working in the real estate sector are officially licensed.
Licensing requires six years of education and training that starts with a Bachelor of Arts in law and culminates in an 18-month licensing program offered by the Ministry of Justice. Before 2004, one had only to complete a year-and-a-half of specialized training to become an officially licensed agent, even if the course was not offered every year. While the law was changed to require a BA degree, there has been no increase in the frequency of licensing courses, which consistently show enrollment up to maximum capacity.
It is no wonder, then, that there are hundreds of unlicensed sellers playing the real estate game, potentially cutting corners as they vie for a minimum two percent commission on every transaction, which in Iceland averages over ISK 415,000 (USD 6,500). So not unlike the high stakes realty market in New York or London, with so much competition in the field, the speed and number of transactions becomes paramount to success. Thus unlicensed sellers have little reason to spend much time verifying the quality of the properties they are dealing with since they merely risk a stain on their reputation rather than losing their license.
RE/MAX is by far the largest real estate agency in Iceland, with 12 franchises in the Reykjavík area, and has received most of the criticism for using unlicensed sellers. In the most severe cases there may be up to 30 unlicensed sellers for every official real estate agent. Although the agency is not breaking any laws, there is a certain risk that monitoring and quality control become second-tier priorities when one licensed agent is appointed to oversee a group of 30 eager sellers and the resulting volume of contracts.
The government has established an oversight committee that monitors real estate agencies, with the ability to force an agency’s closure when it discovers any misreporting of finances or other illegal activity.
Thórdardóttir insists that the committee is effective in keeping people in line, but when asked for an example where any consequences had been applied, she recalled only one agency that was closed once—and was able to reopen just a few hours later.
Agents’ status as intermediaries implies that they are a neutral party to housing transactions, favoring neither buyers nor sellers. The reality, however, is that some builders establish relationships with a particular agent or agency that handles all of their properties. This leads to an obvious conf lict of interest, especially when the real estate agent is expected to play a principal role in resolving disputes over property deals gone sour.
Helgadóttir employed a licensed agent active in Vogar, and was happy with the terms of the resulting contract and the freedom she had to inf luence the design. It wasn’t long, however, before the agent’s priorities became clear.
Helgadóttir didn’t even have walls in her new house until March of this year, more than six months after the delivery date agreed upon in her contract, signed in 2005. In April this year, the building company Trésmidja Snorra Hjaltasonar requested her presence at a meeting with one of their lawyers, insisting that she sign a new contract that would revalue the house at 2007 prices—and thus charge her an extra ISK 2.5 million (USD 40,000).
Knowing the terms of her contract, and the fact that it is illegal for them to call such a meeting without the agent present, she refused to sign. Only then did the agent become involved, coming up with a “compromise” that involved Helgadóttir coughing up an additional ISK 800,000 (USD 12,500) for a house that she had been waiting on for an entire year.
“They were trying to penalize me for not spending Christmas in my new house, for losing a job I had lined up in Vogar, for losing my children’s places in their old schools in Hafnarfjördur,” Helgadóttir says. “My contract was not linked at all to the consumer price index increases. They were just trying to get me to pay more and doing it illegally!”
None of the agencies contacted for this story chose to reveal the number of disputes brought against them, but all insist on the sanctity of the contract. When buyers sign on the dotted line, they have little legal recourse. The result is that few cases end up in court, and those that do tend to have a hard time proving a gross discrepancy between the contractual agreement and the end result. When they can, such as in Helgadóttir’s case, a claim can only be made for measurable monetary losses incurred in such a breach of contract, rather than for all of the side effects that have turned her world upside down, such as being left homeless by not having a house to move into after selling her old apartment.
It is also often unclear who bears the ultimate responsibility for selling a sub-standard house to a trusting buyer. In Skuggahverfi, the swank seaside neighborhood in downtown Reykjavík, a conflict over the deplorable condition of a brand new luxury condominium development has everyone pointing their fingers at each other. Many residents moved in to sloping floors, haphazardly attached balconies and leaking windows; they have sued 101 Skuggahverfi, the real estate group managing the building, who has, in turn, sued Eykt, the company responsible for building the developments, who meanwhile has brought countersuits against residents for stopping their payments.
One Skuggahverfi resident who requested anonymity is at a deadlock in resolving problems he has had with his apartment. Having stopped his payments to the builder, he had to hire another contractor to replace the parquet and the damaged windows present when he moved in. “I am not involved in the lawsuit because the amount that I have had to pay extra was not significant enough. [The builders] say that I have not paid them everything, but since I had to pay someone else then I should not have to pay them also,” he says. “The issue should be resolved and I am not paying more, but I don’t have any idea when this might happen.” He is counting on the agency that sold him the apartment to resolve the situation.
The courts are the only truly neutral party. The central government’s oversight committee could potentially help determine responsibility but at present it only exists to monitor the activities of the different real estate agencies, with no effective way to hold them accountable.
In the face of such apparently ineffective monitoring, it appears that community members are taking it upon themselves to regulate the industry. In Vogar, Helgadóttir is not the only one who has had a negative experience with that particular builder. In fact, when it was made public that Trésmidja Snorra Hjaltasonar was awarded 150 new lots in the community, residents circulated a petition to have the company kicked out. A meeting of the Vogar town council, which is also the planning authority, will decide whether or not the company can stay. This action on the part of residents, as it turns out, may be one of the only solutions that carry any weight.
Because it is only in hindsight that one can distinguish between a fluctuation in the market and the bursting of a bubble, it is difficult to predict the housing market’s current direction. Trends in the rest of the developed world, however, may shed some light on where Iceland could be headed. For starters, the current property crisis in the United States, where unrestrained lending has led to defaults on mortgages and a decrease in available financing which has caused housing prices to drop, will likely affect worldwide confidence in the housing market.
Unlike many major metropolitan cities, Reykjavík’s low population density (about one tenth that of Stockholm, for example) allows it to expand both upward and outward. “There is really no limit to where new developments may spring up,” says the Iceland Chamber of Commerce’s Chief Economist Frosti Ólafsson. “Icelanders like to expand and build new neighborhoods rather than rebuild old ones or tear down the domestic airport to put up houses.”
What is more likely is a settling of the market as certain suburbs gain favor over others, with changes in price stabilizing on a large scale and being distributed across neighborhoods.
In any case, prices are expected to decrease since the HFF reduced the limit on home mortgage amounts back to 80 percent of the total cost of a piece of property. With the banks following suit and raising interest rates, credit is no longer as readily available. People with savings and a high income are less affected by these trends, but for those who cannot afford the minimum 20 percent down payment, the only alternative is to rent.
Half an hour down the road from Oddfrídur Helgadóttir’s new house, 24-year-old Sverrir Arnarsson bought a two-bedroom apartment in the much-hyped downtown postal code of 101 Reykjavík last October because he knew he could get a low-interest loan and saw an opportunity to make money on rising property values. Nine months later, he sold this two-bedroom apartment for ISK 17.7 million (USD 278,000), netting a profit of more than ISK 2 million (USD 31,500). Just two days after putting the apartment up for sale, he had multiple buyers ready to pay his asking price. He now shares an apartment with a friend and his monthly rent is higher than the mortgage payments on the apartment he once owned.
Although he knows conditions may change, Arnarsson sees the potential to make money again by buying a house. He plans to “invest my profits from selling my apartment and make money on that, so that I can have more saved up when I am ready to buy another place,” he says.
The law governing housing transactions is currently under review with an updated version expected next year. The good news is that authorities like the Association of Real Estate Agents and the Association of Real Estate Owners recognize the need for a new set of laws. “We are hoping for a better law, so that it won’t be so loose that you can do whatever you like,” says Thórdardóttir.
Among the changes her association is pushing for are limits on how many sellers may work under a licensed agent, but this could be missing the point. If such limits are imposed while the obstacles to becoming a licensed agent remain in place, there will be a vast shortage of agents on the market. “They preach about having everyone licensed, but at the same time make it more difficult to become licensed,” says Thórarinn Saevarsson, Regional Director of RE/MAX Iceland. “That means the fewer people get licensed, the fewer will get service, and your house will not sell for one or two years instead of one or two days.”
The result of such an imbalance between the number of properties to sell and those legally allowed to sell them could result in the creation of a black market of sorts for new homes, with a consequent nose-dive in effective monitoring and quality control.
More productive would be a comprehensive regulatory system, set up to monitor the licensing of home inspectors, builders and engineers, the standards of real estate agents and lower level sellers alike, and to enforce stronger penalties for any firm that does not meet those standards.
Whatever changes are made, the housing market is showing only slight signs of slowing. As rapid growth continues and companies keep seeing the potential to make huge amounts of money, corners will likely be cut and disputes will likely drag on.
Says Helgadóttir, “The worst part is that even when I am finally able to move in, I know it will not be over. I will not make the final payment until everything is properly finished and I am not sure if I will ever have the house at the standard that it should be.”