| Summary: | The goal of this thesis is to find out if there was a housing bubble in Iceland in the 2010s. We analyze data from Registers Iceland and the Housing and Construction Authority of Iceland on residential property sales and rentals from January 2011 to the end of 2021 and using the price-to-rent ratio method. Excessive housing price volatility, including the building and bursting of price bubbles, can be detrimental to any economy. The price-to-rent ratio is frequently used as a measure of over- and undervaluation in the property market. Analyzing ratios at the local level may help identify if the rise in housing prices is a bubble or is supported by fundamental factors. First, we estimate the residential price and rent indices using a logarithmic-linear hedonic regression model. Then we calculate price-to-rent ratios for housing in Reykjavik, the Capital Region, and Iceland as a whole. For the Capital Region, we individually compare the estimated quality-adjusted ratios from the hedonic model with the quality-unadjusted ratios from Registers Iceland. Furthermore, we impute rent prices for residential properties found in the sales transaction data for Reykjavik using the estimated coefficients of the hedonic rent model, and use the imputed rents to estimate price-to-imputed rent ratios for Reykjavik. The results obtained can be used to examine the dynamics of price-to-rent ratios and their distribution in Reykjavik, the Capital Region, or Iceland. We provide evidence that starting in 2020, the price-to-rent ratio grew considerably during the housing boom. The results of the price-to-rent ratio analysis in Reykjavik, the Capital Region, or Iceland, and the price-to-imputed rent analysis in Reykjavik in this study could signal speculative pressure in the housing market.
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