A Report on the Proposals of Independent Consultants regarding the Housing Policy in Iceland

| Source: Íbúðalánasjóður

The Housing Policy Committee which was appointed by the Minister of Social Affairs and Housing on 9 September 2013 has received the joint report of the independent consultants KPMG ehf. and Analytica ehf. on the consultants´ analysis and proposals regarding the formulation of a new housing policy in Iceland. The proposals of the independent consultants are intended to serve as a contribution to the ongoing work of the Housing Policy Committee and no decisions pertaining to the proposals of Analytica and KPMG have been made. The Housing Policy Committee is scheduled to deliver its final proposals on a housing policy in a report to the Minister of Social Affairs and Housing in April 2014.


On the basis of the analysis carried out by KPMG and Analytica, the development of a new mortgage credit system modelled on that of the Danish system is proposed. In addition, significant changes to the operation of the Housing Financing Fund (HFF) are proposed. The main proposals stated in the report are as follows.

A new mortgage credit system

The proposal calls for the new mortgage credit system to be based on mortgage loans being granted by specialized mortgage companies. Such companies are to be regulated financial institutions, and legislation relating to them must be enacted. The mortgage companies would only be allowed to provide mortgage loans and to finance loans through the issue of covered bonds listed in the market. The mortgage companies would not be allowed to undertake any other activities.

Capital requirements must be based on the same principles as apply to other financial institutions. However, the capital requirements for mortgage companies may be assumed to be lower than is currently the case for commercial banks due to less risk.

One of the greatest advantages of the mortgage credit system involves the balance between lending and the financing of mortgage companies. Requirements must be made for an appropriate balance between the loans and the outstanding bonds of such companies, taking into account conditions in Icelandic markets.

It is likely that the three large commercial banks will each establish their own mortgage company. Smaller financial institutions may also be expected to join forces to establish such a company and the same could apply to the pension funds. Thus, it is likely that there will be at least four to five mortgage companies.

In order to ensure that the adoption of the system is a success, it is vital that as much as possible of the financing of residential housing is channelled through the specialized mortgage companies. As a result, it is proposed that the authorities create an incentive, e.g. by granting mortgage companies an exemption or discount from the special bank tax. Moreover, it is proposed that the pension funds be required to issue all new mortgages through a mortgage company under the new legislation.

Decisions relating to the arrangement of price indexation in the credit market do not have any impact on the proposal of this housing system or its advantages.

Services to borrowers

In the new system, it is assumed that borrowers will receive their loans as a cash loan from a mortgage company or a bank operating a mortgage company in the same manner as borrowers do at present from the banks and HFF. The borrower submits a loan application payment. A creditworthiness assessment is prepared and a value appraisal of the property as part of the loan application process.

The maximum loan granted will probably be 80% of the property value. Provided that the borrower passes  the creditworthiness assessment, the borrower will be entitled to select the type of loan, such as fixed interest rate and length of interest period. An important characteristic of the system is that all such mortgages are pre-payable.

Availability of loans outside the Greater Reykjavík Area

Loans for housing purchases must be available throughout Iceland. It is proposed that the operating permits of mortgage companies stipulate that such companies must offer their services throughout Iceland.

Moreover, it is proposed that the authorities support areas outside the Greater Reykjavík Area that are not offered mortgage facilities to the extent that the authorities consider preferable by providing guarantees for proportions of loans (top-up). Management of the assessment of applications and allocation of guarantees would be in the hands of the Housing Agency (new public body).

Social housing

The only state involvement in social housing (apart from rent assistance grants and tax deductions of mortgage interest payments through the tax system) has been in the form of subsidised interest on HFF loans for social housing. This interest subsidy has been 1% and the loan granted up to 90% of purchase value for a term of 50 years. This support is  equivalent to a 23–28% initial contribution. With an initial contribution, the state would be providing much more valuable support to social housing. It is therefore proposed that instead of subsidised interest, a 25% initial contribution for social housing should be provided. In addition, there should be an initial contribution of at least 10% from municipalities. In this manner, it is believed that the rent for social housing could be lowered by approximately 10–20%.

Rental market

There is some disparity in the supply and demand for rental housing in Iceland. In recent years, demand for rental housing has been greater than supply and prices have been rising. It is most likely that this imbalance is temporary, although it may take the market several years to recover.

Actions are proposed to support the supply side of the rental market: lowering income tax on rental income; full refund of VAT for work on the construction, design, maintenance and improvements to residential housing; and efforts spent on planning issues in the Greater Reykjavík Area to further increase availability of building sites for cost-efficient apartment buildings.

There is a considerable lack of rental housing in many places outside the Greater Reykjavík Area. The reasons for this lack are somewhat different to those in the Reykjavík area. It is expected that the authorities (state and municipalities) seek ways to ensure that the supply of rental housing is increased in areas outside the Greater Reykjavík Area. Any actions taken in this respect must be in close collaboration between the state and municipalities. Furthermore, it should be noted that the  Regional Development Institute (Byggðastofnun) has been involved in projects that relate to the supply of housing outside Reykjavík and could be involved in special rental companies as debt and/or equity providers.

HFF divided in two

It is vital to draw a clear line between the problems resulting from past operations of HFF and the future of HFF. It is considered unwise to maintain HFF’s operation in its current form. It is proposed that the Fund cease completely to grant new loans and that its operation then be divided into two parts:

  1. A new public body, the Housing Agency, which will take over the social assistance role of HFF and other important aspects that relate to the implementation of state housing policies.
  2. HFF, which will be responsible for the management of the current portfolio of loans and liabilities until they expire or the loan portfolio is sold.

New Housing Agency and a clear policy

It is proposed that a new public body for housing issues – the Housing Agency – should be established. The Agency will be governed by the Ministry of Welfare and Housing, which will have overall supervision and implementation of the housing policy. The Agency will be built on the foundations of the current HFF and have the principal object of “…being in charge of the management and implementation of housing issues under the authority of the Minister…” The Agency will be responsible for the allocation of social housing grants and provided guarantees where appropriate but will not be engaged in lending activities.

The Housing Agency will be responsible for implementing the housing policy, which will be based on e.g. the following goals:

  • Promoting security, equality and economy in private housing.
  • Ensuring that people can purchase or lease housing on reasonable terms.
  • Promoting stability in the financing of residential housing.
  • Providing financial support to social housing (non-profit institutions) by means of initial contributions.
  • Ensuring close co-operation with municipalities as regards housing issues.

The HFF portfolio allowed to expire or sold

If HFF ceases to grant new loans, the Fund’s risk would be limited to its currently outstanding loan portfolio. HFF would,  continue to be exposed to credit risk  and interest rate risk due to pre-payments and a low rate of return on liquid funds.

The Fund’s equity ratio would not need to be protected by means of further capital contributions from the Government, as HFF would discontinue the issue of bonds in the market and would not, therefore, have to maintain its credit rating. In the event that the Fund’s equity were to become negative, however, this would be recorded in the government accounts

Based on a set of  base assumptions, it is possible that no further contributions will be necessary to the HFF from the state, as the cash flow from loans would cover the payment of the Fund’s issued bonds. There are, however, great uncertainties as regards the base assumptions in this scenario, and if e.g. pre-payments are higher than anticipated, the Fund will need contributions from the state.

Part of the HFF’s loan portfolio, or its entirety, could be sold. This would make it possible to minimise uncertainties in HFF’s financial development and thereby uncertainties about further financial needs from the state and the risk posed to the state due to guarantees on HFF bond issues. By removing such uncertainties, however, it is clear that the state would realise losses in the sale of the loan portfolios.

If the decision is made to sell HFF’s loan portfolio, a proposal for the arrangement is submitted. This proposal is based on first transferring the portfolios into mortgage companies and then selling the companies. Using this method, the new market for specialised mortgage company issues would be supported.