Iceland Plans to Buy Out Homeowners in Volcano-Struck Town

Iceland’s government has agreed to buy all residential properties in the fishing town of Grindavik, which has become uninhabitable after three volcanic eruptions rocked the region in the last two months.

Grindavik has been subject to repeated seismic activity since the end of 2023, and while no more than a handful of houses have been destroyed by lava flows, some 3,700 inhabitants who have evacuated can’t return due to the risk of further eruptions.

To compensate for the loss of their homes, the government has proposed to pay 95% of the insurance value of all residential housing in the town, which could equate to around 61 billion Icelandic kronur ($440 million). According to the bill, the government will set up and finance an entity to oversee the purchases and claim reimbursements from Iceland’s natural-disaster insurance fund. Outstanding mortgages of some 23 billion kronur will be converted into a combined bank loan to the new entity.

The proposal, which will be submitted to parliament this week, was drafted in cooperation with opposition parties.

With inflation running at more than three times the central bank’s target, there has been concern that financial support to the affected townspeople could cause even more upward pressure on prices. In the bill, the government said that while its fiscal policy would no longer contribute to reining in inflation if the buyout is carried out, it also wouldn’t change the general trajectory of the Icelandic economy.

An additional problem for authorities is how to address a housing shortage that will be exacerbated by the loss of real estate where about 1% of the country’s population lived before the seismic unrest.

Hildur Margret Johannsdottir, an economist at Landsbankinn, said any policy that would lead to increased activity in the building sector could work against the central bank’s ambition to cool off the labor market. Other measures, such as curbing short-term rentals, could compensate for the increased housing demand without fueling wage growth, she said.

Top photo: Smoke and flowing lava during a volcanic eruption on the outskirts of Grindavik, Iceland on Jan. 14. Photographer: Icelandic Department of Civil Protection and Emergency Management/AFP/Getty Images.