One response to labour shortages was to bring in workers from abroad, which together with longer working hours has prevented wage drift from being felt on any great scale. Labour market surveys, however, show contrasting pictures in the Greater Reykjavík Area and regional Iceland. There is an obvious shortage of labour in various fields in the urban southwest, while availability of employment declined in the regions. Great pressure built up in the real estate market, largely reflected in a rise in real estate prices in the Greater Reykjavík Area. Prices peaked at the beginning of 2000 after increasing by almost 24% over a twelve-month period. This rate of increase has now begun to slow down, and by the end of December real estate prices had risen by 13.3% over the preceding twelve months. Credit expansion In the course of the growth period, generous wage agreements were made which boosted real disposable income. The greatest increase in real disposable income was in 1998, or 7.2%. Otherwise it rose by 4-5% annually until last year, when the figure was close to 2%. Over this period, Iceland Stock Exchange has gone from strength to strength. An important equities market has evolved in Iceland, and share prices followed an upward trend until last year. Greater real disposable income and rising share prices, which at least for a while increased shareholders' confidence in their own prosperity, fuelled growing optimism among consumers and investors.
They are also well above the levels generally seen in neighbouring countries. For example, European banks of a size similar to Iceland’s banks have capital ratios of just over 18% and gearing ratios of about 8%. Elsewhere in the world, capital ratios are higher than those in Europe in some cases. Furthermore, many observers consider the actual capital in the European banking system is too limited and that Europe is therefore not the best reference for Icelandic banks. Nonetheless, there is some scope to lower the banks’ capital ratios — and gearing ratios in particular — with dividend payments and changes in the composition of capital. On the other hand, the banks are being cautious in maintaining a so-called “management premium” over and above the Financial Supervisory Authority’s minimum requirement, as it could erode confidence in the banks if their capital ratios fall below the minimum were they to face only mild headwinds. Moreover, the banks must bear in mind that the countercyclical capital buffer is currently 1.25%, but the Financial Stability Council has signalled that it could increase it in stages to 2.5% as the financial cycle gets more wind in its sails. In assessing a desirable level for the banks’ capital, it is important to remain aware of the costs and benefits. At times, international discussion of this topic has been somewhat misleading and, to some extent, affected by bank executives’ interest in maximising their own remuneration through risk-taking, knowing that a portion of possible losses would be absorbed by taxpayers.