Why is Iceland So Expensive? 6 Reasons and How to Save

Over the past decade, the popularity of Iceland as a tourist destination has surged. This is for a variety of reasons. Most commonly noted, it provides incredible natural sceneries with unique, rugged terrain. This terrain includes volcanoes, glaciers, waterfalls, and glimpses of the elusive Aurora Borealis, or Northern Lights. But why is Iceland so expensive?

Iceland’s location on the Earth also ensures its status as a layover midpoint for flights between North America and Europe’s mainland. This makes for relatively inexpensive travel to the beautiful island nation.

Additionally, Iceland was one of the main filming location for one of the most popular television shows in history: Game of Thrones. Our article Game of Thrones Iceland Locations: 11 Incredible Filming Spots dives deep into these areas.

But Do the Costs Outweigh the Benefits?

Many first time visitors to Iceland experience what can only be described as major sticker shock. This happens as soon as they step off the plane. Visitors quickly discover that prices of common items in Iceland are an average of 56 percent higher than the rest of Europe.

In fact, according to Numbeo’s Cost of Living Index for mid-2019, Iceland is currently ranked sixth. This is nineteen spots ahead of the United States. Only the Cayman Islands, Bermuda, Switzerland, Norway, and the US Virgin Islands have a higher average cost of living.

Why is Iceland So Expensive?

Like many other first-timers to beautiful Iceland, you may be wondering: Why is Iceland so expensive? If so, we encourage you to read on. In this deep dive, we dig into the factors that make Iceland such a high-cost place to travel. We also cover how to properly plan an exciting excursion without breaking the bank. Because no, the costs do not outweigh the benefits.

Iceland’s Geography Leads to Increased Costs

As a small, remote, sub-Arctic island in the North Atlantic, Iceland is not well-suited for agriculture. According to the European Consortium for Political Research, Iceland produced about 65 percent of its own food and beverages in 2010. The rest were imported from trading partners, with the top four countries of import being:

  • United States
  • United Kingdom
  • Norway
  • Germany

In many cases, the costs associated with importing food and other goods is passed directly to the consumer. This results in inflated prices for everyday goods and services, from restaurant meals to gasoline to packaged foods.

Additionally, imported alcohol and sweets carry extra fees in Iceland. Wheat products also are subject to high tariffs upon import. This means you could end up spending almost $13 on a combo meal at McDonald’s or more than $8 on an imported 12-ounce beer.

Currency Valuation Plays a Role

The strong currency of Iceland, the Króna, also contributes to higher costs for visitors. Much like the highly publicized recession of 2008 in the United States, Iceland faced their own economic recession at the same time.

In this recession, all three of Iceland’s largest banks, Kaupthing Bank, Landsbanki, and Glitnir Bank, defaulted on $62 billion in foreign-owned debts. As a result, the value of the Króna fell rapidly.

Since this recession, however, Iceland has experienced an unprecedented economic boom, headed by the explosive growth in tourism. With this, the Króna has strengthened by 40 percent against the euro. It has even earned its spot as a top-performing currency in 2017.

As a direct result of this, the buying power of the US dollar, as well as most other major global currencies, have diminished when purchasing goods. commodities, and services in Iceland.

Labor Costs Also Come Out to Play

The labor force of Iceland are unionized almost entirely. About 92 percent of the working population belong to a union. Due to the strong union presence, basic wages in Iceland are far higher than those in other first world countries. This is the case even for jobs in the service industry (hospitality, food service, etc) that would be traditionally low wage.

Currently, the Icelandic minimum wage sits at the equivalent of $15 an hour in the United States. Many of these associated costs of higher wages are passed on to consumers and tourists.

As the country as a whole enjoys the benefits of higher standards of living, for residents the inflated costs are quite affordable. However, this can come as a surprise to visitors of the Land of Fire and Ice.

Taxes Lead to Increased Costs of Goods

As in many European countries, goods in Iceland carry a value-added tax (VAT) of 11 percent on food items and 24 percent on other goods. VAT taxes are higher in Iceland than in most European neighbors. For example, Germany charges 7 percent for food and 19 percent for other goods. It is also higher than the sales taxes charged in many US cities, where food is often untaxed.

However, it is crucial to note that international travelers can get refunds on some of the VAT taxes paid during their visit.

Some of the Expensiveness Is From The Populace

Another answer to “Why is Iceland so expensive?” comes with the small population. Iceland has a population of under 340,000 permanent residents. This is far smaller than even the least populated state in the United States (Wyoming has 572,000 people at last count).

As a result of this, Iceland simply cannot achieve the economies of scale compared to larger, more populated countries. According to Konrad Gudjonsson, chief economist at the Iceland Chamber of Commerce, “it’s very difficult to get the same economies of scale as you have with companies in countries that are 100 times larger.

Without the high demand that exists for goods and services, the prices for just about everything will increase. Speaking of demand…

The Laws of Supply and Demand Play a Role

Finally, the bedrock economic principle of supply and demand plays a role. In 2016, a record 1.8 million foreign visitors traveled to Iceland, a whopping 40 percent increase over the previous year.

With tourists competing for limited resources like food and lodging, prices inevitably rise. And with visitors spending more than $212 million in Iceland the same year, the government was reportedly considering opportunities for raising taxes on tourism to capitalize on this newfound cash cow.

Managing Expectations and Saving Money When Traveling in Iceland

Why is Iceland so expensive? Despite its reputation as one of the most expensive travel destinations on earth, there are ample benefits. Iceland is one of the most naturally beautiful destinations on the planet. Their people are some of the nicest and happiest of any country on earth.

Don’t let the potential higher price tag deter you from the experience of a lifetime. The information below will assist you in preparing. You will also receive some insight in what should be expected for the major expenses of an Iceland vacation.

We will also assist in identifying what parts of your trip to splurge on (treat yo’ self!) and which aspects of your trip should be more focused on savings.

Looking for more detailed information about traveling to Iceland on a budget? Our article Iceland On A Budget: 10 Tips to Save Money While Traveling in Iceland dives deep into money savings.

Accommodations Throughout Iceland

When looking for a place to stay when traveling in Iceland, there are options abound. From Iceland camper vans to fancy hotels, AirBnB’s to hostels and everything in between, Iceland has it all. Tourism, after all, is the nation’s most profitable commodity.

Hotels in Iceland

While luxury hotels have not quite taken the country by storm, there are plenty of luxurious accommodations if you know where to look. In fact, plenty of three and four star lodging options are scattered through both Reykjavik and more remote towns and cities.

On average, most high-quality hotels will cost between $200 and $400 a night. This is dependent on quality of the hotel, location in Iceland, and of course time of year. Weather and potential for crowds play a large role in hotel pricing, too. However, it is possible to score rooms in more budget-friendly hotels for $100 to $150.

Almost all hotels include complimentary Wi-Fi access. This is perfect for those lacking cell phone service throughout their travels in this remote but stunning landscape. Many also offer incredible breakfasts as well, often rolled into the cost of your hotel room.

We have curated guides to the two largest hotel providers in Iceland:

AirBnBing in Iceland

Much like other large cities around the world, Reykjavik is experiencing an affordable housing crisis. As a result, many locals have turned to short-term leasing options like AirBnB to earn additional income renting their homes to tourists.

You will easily be able to discover some quirky, local-friendly accommodations through AirBnB. However, competition within the housing market in Reykjavik and other areas could cause this lodging option to be more expensive than hotels.

Depending on the season of travel, there is the possibility of finding incredible country-side cottages for rent when not being used by owners. Our guide Iceland AirBnB: 10 Most Incredible Options dives deep into a handful of unique and wonderful homes for rent.

Hostels in Iceland

If you are looking to make Reykjavik your “base of operations” and you are looking for a more budget-friendly option, we recommend going for a hostel. Hostels typically provide shared accommodations and modest housing and kitchen facilities.

While Iceland’s capital is home to many of the hostels in Iceland, there are also vacancies and locations in places like Akureyri, Keflavik, Selfoss, Vik and more. A night’s stay in a hostel will typically cost around $40 to $80, far less than comparative nights spent in hotels.

Camper Vans in Iceland

Renting a camper van is perhaps the most cost effective Iceland accommodation. For this reason, it is becoming more and more popular for adventurous travelers. Conveniently, camper vans are a “kill two birds with one stone method. They take care of lodging, while also handling transportation needs. Additionally, cooking facilities inside most camper vans take care of the meal situation as well.

If you don’t mind roughing it a bit, seeing Iceland by camper van is a uniquely immersive experience in the country’s extraordinary landscape. In fact, camper vans are our recommended mode of accommodations and transportation for those looking to truly “become one” with Iceland. We have multiple articles and longform guides on the topic, including:

Transportation in Iceland

Renting a car when traveling in Iceland provides the freedom to travel at your own pace. This ensures that you don’t feel rushed. It also keeps you from missing out on bucket list destinations and attractions.

Keep in mind, most rental cars in Iceland have manual transmissions. While there are still plenty that are automatic, it is important to specifically request this in advance when booking. Also, be prepared to pay extra for this feature.

Generally, the rule of thumb is to book your rental car as far in advance of your travels as possible. This will assist in securing the lowest rate available. AutoEurope and RentalCars are good resources for comparison shopping and booking in Iceland.

For more about renting cars in Iceland, we recommend our guide Iceland Car Rental Tips: 13 Suggestions For 2024 Rentals.

Non-Rental Car Transportation

Maybe you don’t want to rent a car, or don’t have the means to drive around the country. If so, traveling from the Keflavik airport to Reykjavik can be done easily via Fly Bus. Fly Bus runs consistent and timely trips between the airport and capital. These trips start at $25 per person.

Once you arrive in Reykjavik, the public bus system is also inexpensive and reliable. This makes it a good option for intra-city travel. Taxis in Reykjavik are quite expensive and should only be used as a last resort. Uber is not something that exists in Iceland, even in the bustling Reykjavik.

The most daring travelers may wish to try hitchhiking, which is both surprisingly common and safe in Iceland. If you do manage to hitch a ride, be sure to chip in for gas. If you happen to be on the driver’s side of a rental car, you could recoup some of your costs this way.

Saving on Food and Drink in Iceland

Dining out in and around Iceland can become very expensive. This goes double as the local food scene continues flourishing. World-class restaurants have popped up in places like Reykjavik and Akureyri. These days, casual restaurant meals for two can set you back as much as $60 to $80. Fine dining prices can easily soar at and above $100.

This being the case, dining out is seen more as an occasional luxury than a common occurrence in Iceland. So, eating out daily through the course of your trip can add $1,000 to a week-long excursion easily. Note: We spent over $1,000 on food during our eight-day trip, as we ate out most lunches and dinners, but had breakfast at hotels most nights.

Conversely, it may be a better idea to do your due diligence ahead of your travels. Select a few ideal places you’d like to go eat. Money can be saved by going for lunch specials. These typically include two for one specials and reduced prices on specific dishes, and can be found all over Iceland.

Then, supplement the rest of your meals with provisions from low-cost grocery stores Nettó, Krónan and Bónus. Avoid the chain supermarket 10-11, where prices are notoriously high and predatory towards travelers.

Here are some articles we have centered around food options:

Sightseeing in Iceland

Fortunately, many of the most compelling attractions in Iceland are natural wonders. These can be enjoyed by visitors at minimal cost. Examples include:

  • Glaciers of Skaftafell National Park
  • Steaming geothermal eruptions of Geysir
  • Rocky cliffs and historic sites of Thingvellir National Park

…and much, much more.

However, you’ll still need a means to travel to these destinations, and you may have a richer experience with the assistance of a tour guide or specialized gear. Guided sightseeing tours can be a worthwhile investment. These provide travel, guidance, safety and group camaraderie as you head out in search of the Northern Lights, hike a glacier or go horseback riding through lava fields.

Within Reykjavik, the City Card offers entry into a long list of popular attractions, including the Reykjavik Zoo, museums, galleries, thermal pools and spas as well as transportation on the public bus system and a ferry ride to the historic island of Viðey. It also provides discounts for tours and attractions outside the city. The card is available in 24-, 48- and 72-hour increments, with prices ranging from $32 to $55.

Shopping Throughout Iceland

Shopping in Iceland can be extremely costly depending on what sort of souvenirs you wish to take home. Clothing is heavily taxed, with a pair of jeans marked up as much as 40 percent compared to other European countries.

The “puffin shops” that line city streets purport to sell authentic Icelandic memorabilia, but in reality, most of their wares are mass-produced trinkets imported from elsewhere. The National Museum gift shop, the Handknitting Association of Iceland and small local boutiques are your best bet for a genuine keepsake.

Bargain hunters may want to check out the Kolaportið Flea Market, which is only open on weekends and is a well-known hub for hagglers. Kringlan and Smáralind, Reykjavik’s two major shopping malls, are also opportunities to score a deal.

Why is Iceland So Expensive? A Final Word

Iceland’s reputation as one of the world’s most expensive travel destinations is not without merit, but don’t let that scare you away from planning a trip to this breathtakingly beautiful and welcoming country.

With a little planning and well-defined spending priorities, you can enjoy the vacation of a lifetime in the Land of Fire and Ice—and the memories you bring home will be priceless.

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