Statistics Iceland has decided to change the method of averaging real interest rates in the model for owner occupied housing in the CPI as of May 2005. A twelve month moving average will be applied instead of the five year one introduced in August 2004. This change leads to a lowering of the Icelandic CPI by 0.45% in May 2005.
Housing credit in Iceland changed markedly in 2004. The public housing loan system was changed in July 2004 which brought about a fall in mortgage rates and soon after that commercial and savings banks increased greatly their housing loans at competitive interest rates. The initial fall in mortgage rates was included in the Icelandic CPI in July but as of August 2004 it was decided that the variable real mortgage rates, used in the calculation of the simple user cost of housing, should be calculated as a five years moving average.
This decision was made in anticipation of frequent mortgage rate changes which might give rise to month-to-month volatility in the CPI. The feared volatility of real interest rates on housing credit has not materialized and the rates have over the recent months been stabilized at a substantially lower level than before.
The new method will be applied until the CPI is rebased in March 2006 when it will be reconsidered.
A new issue in the statistical series, Hagtíðindi, has been released containing an overview of the CPI 2004-2005 and its housing component in particular.
Statistics