Daily Archives: March 13, 2013

James Mackintosh

Just a quick update for those who love Iceland as a model (a category which unites the unlikely pair of uber-Keynesian Paul Krugman and Conservative eurosceptic Dan Hannan).

After its disastrous banking and property bubble and bust, house prices have been growing strongly again, and are within a whisker of their 2008 highs – in stark contrast to Ireland and Spain. All three (with two different measures of Spanish housing) are shown in this chart, and Iceland’s break from the Irish/Spanish pattern is clear:

House prices Iceland, Ireland, Spain

This, just like the country’s return to economic growth, looks like another justification for Iceland’s decision to refuse to bail out its banks, unlike most of the rest of the world.

Now, I’m no friend of bank bailouts, and would much rather see middle-class bank creditors take losses than taxes rise on the poor to subsidise those creditors.

But things aren’t quite as simple as the housing chart shows. As well as cleaning up its banking system through a gigantic default, in large part on foreigners, Iceland’s krona has collapsed.

When measured in foreign currencies, the people of the island are far poorer than they were, something which really matters for a place which imports virtually everything it needs other than fish and electricity.

One example is the import of cars: for the four years since 2008, the total tonnage of cars (I know, funny measure, but that’s how Iceland provides it) imported is lower than for the single year of 2006. And this isn’t only because of the extremes of the bubble: last year, even as Iceland began to recover and imports picked up, saw fewer cars imported than in any year from 1999 to the collapse.

Adjusting Icelandic house prices into euros, then, allows a fairer comparison with Spain and Ireland’s outcomes (although not a way Icelandic residents will think about it, of course). And it tells quite a different story:

Now, this doesn’t matter to Icelandic homeowners paid in krona. But it does put a bit of a damper on the idea that Iceland is having a strong recovery.

Measuring in krona, even Spanish house prices have started to rise, as you see in this next chart: