I've read here that "in Iceland you are allowed to do this by law as long as you stay away from houses and use common sense like you say". Wild camping in Iceland is one of my ideas for the next summer. The question is what does it means "stay away from houses"? And what should be understand as "common sense"? For instance, if I rent a car to move along the island, may I stop at the side of the route with the car and camp? Of course, I'm not talking about the Ring Road. I'm thinking in secondary trails.
The "Visit Iceland" website has a page about your rights to camp in Iceland.
So, if there is no sign, and the land isn't being used to grow things, you have the right to camp there for one night. That is pretty much all the law says.
So, yes you can camp at the side of the road, IF there is a place to park your car. You should not park your car on the land.
Staying away from houses is just a basic courtesy. The best rule of thumb to follow in my experience is to never be close enough that you can see anything in the windows, and definitely stay away from gardens and obviously enclosed personal space. 300 meters at the minimum.