Best cities to live in Iceland

There is only one place that counts as a city in Icelandic, and that's Reykjavik. The rest of the population lives in towns.

The Reykjavík area is where 2/3 of the population lives, and therefore where most of the job opportunities are. Some people prefer living in Kópavogur or Hafnarfjörður, but commuting into Reykjavík can be quite slow in the mornings. Same goes for Mosfellsbær.

If you want to live outside the RVK area, Akureyri is a lovely town with great outdoor activity opportunities, especially if you like skiing. With a population around 18 thousand, it's not overflowing with job prospects but there is still decent diversity for such a small country. One disadvantage living there is that if you want to go anywhere abroad, you'll first have to get to Reykjavík where most international flights depart from. Domestic flights are often disrupted in winter due to weather, and the drive is at least 4 hours.

There are several smaller towns sprinkled around the country but I don't know many people living in those places long-term. Usually people who choose to live in those places have family/personal connections that drew them there.

This is a bit late, but I live in Hafnafjordur and I think it is an ideal town/city because it actually has a downtown area which is charming year-round, though for Christmas there is a very sweet Christmas market, the interest of lava rocks and winding hilly streets with the most northern botanical garden, including a bonsai,  a lovely library and ponds.  There are several nice restaurants and a fabulously well-maintained and landscaped paved walk along the sea. Before this I'd lived in Gardabaer but I much much prefer and recommend Hafnafjordur.  It's still quite close to Reykjavik but absent the tourists and tourist traps, noise.  Plus people feel friendlier. It is also considerably less expensive for the space you get.