Economy & Trade, Europe, Financial Crisis, Headlines

ICELAND: Living With Ghost Towns*

Lowana Veal

REYKJAVIK, May 4 2009 (IPS) - Icelandic municipalities are being forced to repay individuals who had been allocated building land in new residential areas but can no longer afford to build.

During Iceland's boom years, when the population of Reykjavik was growing at a rate of one percent per year (Iceland has a population of about 300,000), new residential areas were being planned on the outskirts of Reykjavik, and plots allocated to families and developers.

The plots of land were sold at high prices to subsidise the cost of roads, shops, schools and other necessary enterprises. Buyers took bank loans to cover the cost of buying the land and building a house. Many took loans that were either completely or partly in foreign currency – especially Japanese yen, euros or Swiss francs – as had been the norm in Iceland until then.

But with the collapse of the banks in October last year, the Icelandic krona weakened substantially against other foreign currencies, and homeowners found that they were paying at least 30 percent more on their mortgages than before.

Building a new home suddenly appeared a less inviting prospect, so many people tried to return their plot of land and get their money back from the appropriate local authority. Some local authorities are now in serious financial difficulties, and are having to take loans in order to be in a position to repay the plot owners.

They are also not in a position to be able to provide schools and other facilities that were promised at the start, although they have an obligation to do so.

Developers who had bought land are also in a difficult situation, as some of them have gone bankrupt. Others have fully-built houses that they cannot sell. As a result, 'ghost towns' can be seen in many of Reykjavik's outlying areas: roads, streetlights and half-built houses, but not much else.

Thorleifur Gudmundsson works for the estate agents Eignamidlun. "Previously one could expect a new neighbourhood to be fully developed in three years. Now it is likely to take six to seven years. It will probably be the larger apartments and luxury flats that will be the hardest to sell," he says.

Not long ago, several blocks of luxury flats for the elderly were built on a site adjacent to a main arterial road out of Reykjavik. The apartments were supposed to have access to all sorts of service facilities, but these were never built.

"We had these apartments for sale at one time. At that time rights of residence were being sold, and 10-15 apartments were sold that way. When it became clear the Nysir (the developers) could not stand up to their obligations regarding the building of a service centre, which was supposed to be built between the blocks and a nursing home that is currently being constructed, the holders of the rights of residence were invited to withdraw from the sales process, which they did," says Gudmundsson.

Some people saw in advance that the housing bubble would burst. One of them was Robert Aliber, professor of international economics and finance at the University of Chicago, who first came to Iceland in June 2007. "It was immediately apparent that there was a bubble, the Icelandic krona had a very high value in the currency market. House prices had doubled in the previous four years, and stock prices had increased by a factor of eight or nine," he told IPS.

In May 2008 he warned conference guests about this when lecturing in Reykjavik. "The implosion will occur within 12 months," he said. But few took any notice of him.

In fact, between February and September 2008, a number of foreign economists visited Iceland and predicted that the banks would collapse. No one took any notice of them either.

It is not only residential areas that have been affected by the economic crisis. Bauhaus, a German company that runs a chain of huge DIY shops, was allocated land in Reykjavik and, after building roads and a car park, completed the construction of a massive store of 21,500 square metres last year. This was supposed to open last December.

But economic conditions have meant that it has not yet opened, and it is possible that the building will be dismantled and sent back to Germany.

Another victim of the financial crisis is a concert and conference hall that was supposed to open later this year. Its developers went bankrupt late last year, so all construction workers were laid off. Reykjavik city council and the minister of education decided to rescue the construction project. Nevertheless, no overtime is being worked, and its opening has been delayed from December 2009 till March 2011.

*Not for publication in Italy.