1) Rent a car - We were stoked we did. We only spent about a day and a half all up in Reykjavik, not because it´s a pants city or anything (although it´s far from my personal favourite as far as European cities go) but because the magic of Iceland is definitely in it´s countryside and coastline. There is of course the option of tours and daily excursions - the HI hostel in Reykjavic is almost wallpapered with leaflets, however we hired a Toyota Yaris which worked out cheaper with two of us even despite the extortionate costs of gas. You also save on staying in hostels outside of Reykjavik - some almost half price in comparison.
Be aware that you will be driving in extremely changeable weather conditions though - it was early spring, but we had at least a few inches of snow every day, and at times were driving in near white out conditions. (You can hire a 4x4 if you want to, but the Yaris on snow tyres was fine for us)
2) Yes, Iceland is expensive - and the worst thing is the price of beer. Try NZ 15 for a small glass of beer at a restaurant. And I do mean small. And outside of Reykjavik, food is pretty hard to come by- your only option often being a small diner attached to a gas station, or just the fridges in the gassy itself. We ended up buying supplies and cooking ourselves a lot.
3) Definitely check out Gullfoss - the waterfall pictured in our last post. In fact, anything that ends in foss is good. Or -sarlon, or -jokull. We were not disappointed.
One of the highlights for us was Jokulsarlon, noted as the scene included in a couple of old James Bond movies, and I can now see why. It´s apparently a glacier river lagoon- a large lagoon where the glacier breaks off into and leaves giant house sized lumps of ice that break down and flow out a river onto a wild iron sand beach. The beach is a bit like imagining Muriwai in the middle of winter minus a few extra degrees and with giant ice chunks washed up on the shore and amidst the breakers.
The blue lagoon is also definitely worth a visit.
4) We were glad with our time selection of spring - the days were long enough, and we should have - but didn´t - see the northern lights due to cloud cover. But during this time of year Iceland is still kind of in winter mode - things close earlier, some tourist type things don´t even open at all, and access to some sites can be harder (In particular we couldn´t get to the rock formations at Dyrholaey - apparently a hole in the rock type thing, but the road was closed, and usually is throughout most winters.)We also didn't get to see Puffins, as they don´t arrive in the country till May.
You could try visiting in Autumn to see if this would get the best of both worlds...
The hard part for anyone really is chosing where to spend their time - we picked the southern coast, but with more time the north western region also sounded interesting, with heaps of Fjords etc to see...
Well, hope this helps :-)
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