Building like this in Iceland makes some sense; there are very few indigenous building materials and not much to burn for heat. Earth sheltered houses are extremely warm as the sod is such a good insulator and has great thermal mass.
On the other hand, as I learned on a recent trip, Iceland is poorly named, it really should be Waterland. Any earth-sheltered house had better be very carefully sited so that it doesn't fill up with water. They are probably best built into the sides of hills, as they were in Hobbiton.