Chapter 11 of 13
Going forward
Redirect construction bandwidth, don't just add to it. The market has not proven able to guide construction capacity toward what is missing. It chases margin at the single-project level, converges on the same high-margin product that cannot clear, and ends up hurting its own bottom line. What is needed is the central planning and coordination the market has explicitly not produced on its own: between the unions bargaining on behalf of renters, the six capital-area municipalities that release plots, a fiscal authority willing to scale stofnframlög by an order of magnitude, and the pension funds whose balance sheets could finance build-to-rent directly rather than through the bank-bond → developer-loan chain that takes a rate spread at every step. The municipalities themselves should be balance-sheet participants — equity partners in the buildings they zone — so that plots are not bid up at auction against the very product the plot was released to enable. That is what redirecting existing construction capacity looks like.
Ban new CPI-indexed mortgage origination. The verðtryggð system is the transmission channel by which housing-cost inflation becomes wage and contract inflation, and — as the examination of Suspect 3 showed — the escape hatch that neutralizes the CBI's rate tool. The remedy is not gradual: ban new indexed mortgage origination by legislation. Existing indexed mortgages are grandfathered — no retroactive disruption to current borrowers or to the pension funds that hold the corresponding bonds. But every new mortgage is nominal. At the current policy rate of 7.50%, nominal mortgages are unaffordable. Mortgage origination freezes. Housing demand drops. Prices fall. And falling house prices pull the housing component of CPI down with them — which is exactly the mechanism the CBI has been trying and failing to activate for four years. With housing CPI falling, headline inflation moves toward target, and the governor is forced to cut rates — not as a concession but as a response to the market conditions the de-indexation created. Lower nominal rates make new nominal mortgages affordable again. The system rebalances at a lower rate level with a mortgage market that actually transmits monetary policy. The coordination failure breaks because the legislature acts first, the market responds second, and the central bank is compelled to follow third. The pension fund sector — roughly 200% of GDP in assets, much of it matched against indexed liabilities — manages a gradual runoff of its legacy indexed book as existing mortgages amortize, without the shock of a retroactive conversion. This is the only structural reform that simultaneously repairs the rate tool, breaks the CPI feedback loop, and forces the rate normalization that the CBI will not undertake voluntarily.
Both remedies can be legislated into place without touching the Central Bank's framework. The Alþingi acts; the market responds; the rate path normalizes as a consequence of the conditions created, not as a concession from the governor's office. What remains untouched is the framework itself — the institutional assumption that the policy rate is the instrument through which inflation is answered. The remedies above work around it. Whether it should be worked around indefinitely, or whether the framework deserves scrutiny on its own terms, is a separate question.