Danish bank launches negative interest rate mortgage
theguardian.com
theguardian.com
That means the bank is absorbing a real loss of 1.5%/year on the deal.
Meanwhile, the housing market is roaring:
https://tradingeconomics.com/denmark/housing-index
It would be one thing to see negative rates in a declining property market and/or in a deflationary environment.
However, negative rate mortgages are happening in what looks like a normal economy with low inflation and red-hot housing market.
Somebody is very wrong about one or more of the following:
- the future direction of the housing market
- the future direction of interest rates
- the future direction of inflation
Edit:
Google translate sheds some light. It appears that the Danish equivalent of "points' clouds the picture:
> Total repayments before tax DKK 277,392 (on a DKK 250,000 loan) - of which total interest and contributions DKK 8,264 changes in the exchange rate will affect the size of the amount paid out.
https://translate.google.com/translate?hl=en&sl=auto&tl=en&u...
Low, but not negative.
(As I understand it) the Eurobor rate is negative (the rate that the central bank lends to the other banks), so its unlikely that the bank are taking the hit directly.
ECB has its own rates (e.g. deposit facility, marginal lending facility for overnight deposits and loans).
Who buys the bonds, could be anyone.. banks, pensionfunds, people who need to store money, in an “insured” way.
For some loans, on some conditions, the morgage is actually negative, and lender is either paid a quartely price, or the debt is lowered accordingly. (This is for the morgage named F5, with a fixed 5year rate, and when the house has very low debt, then the fee charged, is also lower, as it is based on risk)
These bonds are considered to be very stable, about the same quality as state bonds, as the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction) so can usually recover most of the money through a forced sale. Also there's a fee on top of the bond rate to absorb the losses as far as I understand. The fee depends on the security percentage, so if the lender only has a security in the top 60-80% part of the value of the house, the fee is much higher, see the tables here:
https://www.mybanker.dk/sammenlign/bolig/bidragssatser/
The Danish central bank has had negative interest rates for some time, and these real-estate bond rates have also been falling.
When taking out a mortgage, you can either opt for a fixed rate for up to 30 years, or variable-rate bonds where the interest is redetermined periodically, e.g. once a year. The variable-rate bonds have been negative for some years now. The news here is that the rates have been falling even more lately, and that you can now get the negative rate fixed for up to ten years.
In any case, it's the bond investors who are losing money, not the real-estate lenders who apply a fee on top, both as a rate and a fixed fee when applying for the loan.
The rates are so low that I think that if you're in the low-risk category, you might end up with a small negative total rate. Of course, the fixed fees when obtaining the loan may eat that.
This appears to be a first step to pass negative rates onto consumers, in this case onto borrowers where the first mover has an advantage.
The first one to do it will be a pariah (briefly) but the next 5 will be "just following the trend" - the question is who will be first?
>can usually recover most of the money through a forced sale
This exact line of thinking is what led to the US real estate crash in 2008/2009
One of many issues leading into the 2008 crash was how Us mortgages were bundled, rated AAA, then resold as an investment tool. However, the ratings were falsely boosted to promote investment and when the underlying junk mortgages fell through and demand fell off a cliff with the rest of the economy there was no way to flip foreclosed housing to make up losses.
In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008. Current US auto loans may be much more similar than these Danish loans.
Danish loans are definitely securitized and sold as investment tools. They are a classic interest rate risk hedge.
It’s been a while since I was adjacent to them but the bigger difference in Danish mortgage backed securities were a) no governmental guarantee on them b) less protections for the borrowers than in the US c) no derivatives d) much smaller market & e) much longer history.
So credit risk, which is what ratings agencies nominally judge is likely not a problem.
Interest rate risk is though, but given its more straight forward, it’s what investors are looking for exposure to & there is low leverage it’s unlikely to cause systemic collapse.
But what’s that total asset value if interest rates are 10% (vs -1%)?
From olau's explanation, it seems that there is enough money flowing, that more than 80% can be financed (in some way) even if it is not in a single or collateral-backed loan.
I think the situation currently is that you need 5% in downpayment yourself, then the bank can supply the 15% (at a much higher, individual rate) and the real-estate lender will provide the most secure 80%.
I was trying to explain how the bond rates can go so low.
The real-estate lenders have rigid policies in place as for who can get a loan.
Of course, enough correlated failures, and the system goes down.
But there was a crashing housing bubble in Denmark too in 2008/2009, and to the best of my knowledge none of real-estate lenders went down, although they did increase their fees to cover losses. Banks were crashing, though, until the bailouts started.
I personally think that the overall system would be more healthy if the real-estate lenders and banks in general did not protect their investors against losses, but just passed them on so you avoid this sure-everything-is-fine until it crashes. But again I don't know much about the banking world. Maybe that idea is too complicated.
One would get a mortgage from a Building Society for around 75% of the property value, and had to get a Bank Loan for the remainder which they couldn't cover from savings.
We even had 100%+ mortgages for a time which included a loan on top of your mortgage to modernise and furnish your property.
Nowadays, 5% deposit mortgages are available but 10% is more typical. We also have a popular government “help to buy” scheme which some think is reckless as it allows people to get into a more expensive new build home (which typically fall in value after first occupier) with a 5% deposit.
A loan for your deposit would not be acceptable as the mortgage company want to see you have skin in the game.
UK housing market is a complete mess and in my mind hugely overvalued. The can has been kicked down the road for over a decade now. If I didn’t have a family who needed secure housing situation I would sell to rent in a heartbeat.
Cheaper debt means people take out larger debt to continue buying houses at market rate. Housing supply continues to deplete and people continue to pay a premium as more expensive houses are the only thing on the market. Lending drying up for the non-capital class will deteriorate the housing market.
I think a lot of headlines and people are conflating the negative interest rates with other unrelated signs.
https://en.wikipedia.org/wiki/Inflation says "The measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time." and links to https://en.wikipedia.org/wiki/Consumer_price_index which says "The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is in turn a weighted average of sub-sub-indices." and goes on to give an example (apparently ficional) in which housing makes up 41.4% of the index.
Edit: My copy of Samuelson and Nordhaus, Economics, 19th edition, has an example of a consumer price index including housing weighted at 42.4%. At that weighting, unless my math is off, the remaining 57.6% of the stuff in the index would need to get cheaper by 1.2% to get to overall 1% inflation with a 4% increase in housing prices:
42.4 * 1.04 + 57.6 * (1 - 0.012) = 101.00479999999999
- Buying a house is not a living expense, it is a capital investment. This is the reason why statisticians either only include rents (e.g. the EU Eurostat) or replicate the housing costs of owner-occupiers with an “owners equivalent rent” (the US BLS does this).
- Housing might be 30% or more of CPI in the US but none of it is house prices for the reason above. Most of it is rents and owners equivalent rent, some of it is furnishing costs, some of it is utility tariffs, some of it is costs of repairs and maintenance.
Aren't you contradicting yourself when you go on to say that both the US BLS and Eurostat do include housing in their indices?
> statisticians either only include rents [or] “owners equivalent rent”
OK. So housing is part of the CPI, yes?
If I understand https://www.ecb.europa.eu/stats/ecb_statistics/escb/html/tab... correctly, Eurostat weights "actual rentals paid by tenants" at 6.1%. (edit: ECB, not Eurostat)
> none of it is house prices
This is the first mention of "house prices" in this thread. The index linked in the ancestor comment called itself "housing", not "house prices". Good for you if you insist on making the difference, but then if you make the difference you are not talking about the thing I was talking about, I think.
Also, some of it is house prices if house prices factor into the "owners equivalent rent", or is that made up out of thin air? Also, rising house prices cause rising rents, so indirectly they are represented anyway.
When taking about inflation it's also always good to remind one self that the pool of money also changes. And the fact that housing usually is connected to mortgages, which in turn expands the amount of available money. But this paragraph has nothing to do with your comment so I'll just stop there!
This document "How is inflation measured?" from the Riksbank: https://www.riksbank.se/globalassets/media/rapporter/ekonomi... doesn't give weights in general but does say this (emphasis mine): "the method in which housing costs for owner occupied housing are measured are an important source of non-comparability, partly because they make up a large proportion of the CPI (around 10 per cent in sweden)". Note the "owner occupied" part, so this isn't even just rents! But then I don't understand the rest of the discussion that follows this.
Also Statistics Sweden at https://www.scb.se/en/finding-statistics/statistics-by-subje... lists "Housing, water, electricity, and fuels" as one of the "main groups" in the CPI, though this only suggests but does not prove that housing does have a non-zero weight.
As another poster mentioned, though, inflation or deflation as general concepts can refer to any price or cost that increases or decreases.
The more reasonable way to look at it is that it is high inflation and a weak housing market. If the housing market was so hot, why would interest have to drop below zero?
Rather, houses are extremely expensive because money for houses (i.e. mortgages) is extremely cheap.
In fact the providers of the capital will pay the bank for those mortgage-backed bonds (they get a negative yield). The bank will get some spread from the client, who will also pay.
https://www.google.ch/amp/s/amp.ft.com/content/820e3aac-ba1a...
Apart from not having the money.
Whatever new rate you might get is not the business of your previous loan holder.
As a rule of thumb if you refinance from a fixed rate to a better rate you have to pay penalty fees if the rate is worse for the lender (better for you) relative to how much the lender would have made off you if the loan had continued at the previous rate. Because of this it only really makes sense if you can save money on the loan due to other factors that current market rate i.e. being able to pay of your mortgage at a faster rate, your credit rating has improved (or equivalent lending criteria), the lender is noncompetitive compared to the rest of the market, you believe the floating rate will decrease further in the short term and want to refinance to a floating rate before the penalties increase to match (though you'd be outguessing the rest of the market).
Refinancing from a floating rate or a fixed rate that is better(for you) than the market rate will have no or low penalties as your basically already paying market rate or worse and the lender has little downside in getting their money back.
So realistically if you believe that in 5 years the interest rate will be the same or lower you should be floating (or at least negotiating 5 years fixed instead of 10) and then you could negotiate for a lock in at that time.
That’s very surprising. Do you have a reference in English?
Edit: nevermind, I’ve found that’s indeed the case and those are callable bonds (so the prepayment risk is included in the price).
deflecitation
But there's still interest rates? People still lose money by taking out a loan to buy a car.
The reason nobody takes a loan for groceries is because groceries are cheap! There's 0 point in taking a loan for groceries unless you literally have no other money.
Meanwhile many people can't afford to buy a car/house with cash, so they're forced to take a loan (and lose money in the long run)
Many people do. Credit Cards and Credit lines.
But I wonder if credit cards will follow suit and offer negative rates. Somehow I doubt it, though.
Bullshit. It's not as popular as in the US, but it's not like credit cards are unheard of here.
https://investors-corner.bnpparibas-am.com/markets-strategy/...
I imagine that housing in Copenhagen is similar to Amsterdam, and has been appreciating quickly.
From an international perspective, I think it can be argued that these locations are still undervalued. They're still somewhat affordable to local tech workers, whereas in locations like SF, NYC, LA, Toronto, London, etc.. they're not. And from the perspective of Americans, or say people in Hong Kong, these properties are remarkably cheap due to your socialized economies.
I'm still surprised that foreigners haven't purchased all of the real estate in the city centers of Denmark and the Netherlands.
Switzerland has been negative for years.
Negative interest rates mean only 1 thing. The central bank is 100% confident that they are on the brink of deflationary spiral; much like Greece or Japan.
This is all connected:
https://news.ycombinator.com/item?id=20615403
https://news.ycombinator.com/item?id=20654624
https://tradingeconomics.com/canada/households-debt-to-incom...
When you are above 100% disposable debt to income. It means you must stop spending or your debt continues to increase. 170% is worse than the USA's financial crisis. Other countries like Australia are up around 200%.
We have reached a long term debt cycle. We are about to have one of the worst recessions in a very long time OR depression.
There was people mid financial crisis who were still denying the recession. There are tons of people who are saying we are going to have a recession during market highs.
>but Australia's economy hasn't broken yet (it's weak, but that just means it's doing better than comparable nations but less than what it could be if we weren't being mismanaged by the most incompetent government this side of the black stump).
I'm not Aussie; love Australia though. Politics aside, that's the thing people don't understand right before a debt cycle. Housing prices go sky high, car manufacturing dies, debt becomes tremendously cheap, manufacturing isms crash or contract, prime rates usually just went up, unemployment at historical lows.
Literally all these indicators are pretty strong indicators and ALL of them are happening.
>how can I rely on a forecast that is eternally bad? I guess the economy will turn sour eventually, but I can't rely on a prediction that's always bad news since I'll miss all the good.
That's more a perspective. If you watch CNBC, they literally didn't believe the financial crisis was happened and it has been a bull market since forever. Zerohedge on the otherhand will have an article a day explaining how society's downfall is upon us.
The important thing to understand is that literally nobody has a clue what's going to happen.
We may never have another recession; ETFs and passive nature of investing could lead to markets just being completely stable from now on. Bitcoin could be the one picking up all the volatility, leaving the stock markets stable.
Personally I think the debt cycle is immutable.
One person's spending is another person's paycheque. When the automotive sector has basically started laying off people because people aren't buying cars; and it's happening to all Euros, Japanese, and North America car manufacturing companies are all laying people off. That's the beginning of the cycle downturn.
Is this a good thing for people who hold cash assets? Meaning, would you be able to buy say a $40,000 car for $20,000 in case this happens?
The problem is that when people do that, it means people arent spending money resulting in more deflation.
> He argues that undermining the ’time value’ of money–or the principle that money available now is worth more than money in the future because you can use it to earn additional money–won’t lead to economic growth. In fact, he says, negative rates are going to end up leading to a rethink of modern capitalism and political society once people realize they have big consequences.
So to avoid inflation, instead of printing money, we lower interest rates.
But once interest rates go below 0, that also undermines the time value of money.
Oops.
Negative interest rates are supposed to spur investment elsewhere. However, negative rates have not led to the desired economic expansion in places like Japan that have had them for years.
Inflation is very low in Denmark, near a deflation point, which is generally considered bad. The bank is trying to spur inflation with these negative rates.
One could consider something like a Gold ETF where a percentage of the gold is sold every year to pay for the cost of storage as a negative interest rate cash alternative. You lose money every year too, but central banks can’t print it.
What would explain the current scenario, where lenders will lend at negative rates, is:
a) investing opportunities suck, and
b) they can't reliably hold their dollars/kroners anywhere cheaply.
That makes sense, although another commenter said inflation in Denmark is very low right now, so it doesn't seem to apply here.
No, that still wouldn't favor this kind of lending, because the contract is specified in nominal terms, so you end up with less, even in that sense; it would always make more sense to buy something that holds its real value.
Now, if you were paying someone $1 to give you a can of tuna in a year, when tuna cans currently sell for $0.99, that might make sense in hyperinflation, because you'll get one tuna can worth of real value then, which you could legitimately value more than the dollar today.
But that's not what's happening here. They're paying $1 for $0.99 a year later. [1] There are very few scenarios where that makes sense, and especially not hyperinflation, where the $0.99 will only buy a hundredth of a can of tuna in a year.
[1] Not that specific ratio, just using those figures to keep the example simple.
Even if you could hold paper cash, you'd still need to store and secure it, which costs money.
When looked at through that lens, it makes more sense. Rather than giving someone a loan that you expect to get paid for the risk, you're asking them to hold your money for a while, and they are expecting to get paid for the risk (of having to pay you back more in real terms than you lent them).
Notice that these are fixed rate loans:
>0-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.
Increasing inflation would help those who have taken fixed rate mortgage loan because the real value of their loan will decrease faster.
I personally think central banks have not understood that lower interest rates decreases inflation rate. Ie normally and historically central bank would try to increase inflation by lowering interest rate and thus how many have jobs. But jobs are now done automatically by software robots and that get cheaper by lower interest rate to invest in. But central banks thinks lower interest rate will increase inflation.
You can set the interest rate little bit below zero, but you can't go significantly below zeor or banks just start storing cash in vaults (it becomes economically viable to physically store vast amounts of cash). You can actually think these zero or negative rate mortgages as bank's way to store capital.
I don't think the root cause is financial or monetary policy. Developed countries are aging and their economic dynamics is fundamentally changing and they become prone to having secular stagnation. Japan led the way, Europe and the US will follow.
This happens because investors a wary of putting too much of their capital in stocks. Nobody knows what Trumps trade wars will lead to, so that's a significant risk factor for stocks.
Consequently, investors look for other places to put their money until the uncertainties gets cleared up. Preferably somewhere safe - meaning not necessarily in a bank as banks can fold. Danish real-estate bonds fits that: The Danish real-estate market is generally considered sound.
Furthermore, Denmark has a declared policy of closely following the Euro. The DKK has to be within a narrow band of 2.25% (IRRC) of the Euro. Having followed this policy ever since the EMS disbanded, investors generally trust this commitment.
Which means that until Trump cleans up the disturbance he has created, investors will flee stocks and look for safe bonds, to the extent that lenders/investors will actually pay for safe investments.
While attractive for lenders, it is a sign that something is very wrong with the economy. In a healthy climate money would flow to the stock market.
Or how the institutional investors they mention make money?
Now who buys the bonds then and “loose” money? Mostly institions, pensionfunds, corporations and normal investors. They take on theese investors, because they have to.. rates in banks are even lower (even more negativ), and deposits are only insured for about 100.000euro. These bonds, while negative, are more secure, and less negative.
Well at least the explanation does, but the world is still crazy!
Brinks will store it for you for 0.72%/yr. https://goldsilver.com/vault-storage/
This is effectively saying that someone is willing to loan you 1mil, and pay you negative interest on a loan of 1.1mil as long as you pay a fixed payback per month. So end of line you still payed more than you got, but every month instead of paying a bit more than your fixed payback, it’s slightly lower. Bank still makes money selling you the loan, investors still get more money back than they invest. Only thing noteworthy is that some of the math that used to be related to the fixed monthly positive interest is now covered by the upfront rate of getting the loan.
No, they don’t. That’s the point. The reference rate is negative because the investors are buying bonds which will lose money.
As far as I understand the issuer cannot just sell the the bonds at 105% or whatever to account for the loss upfront with the price converging to 100% in 10 years (because these are callable bonds) and apparently they have some technical problems to implement negative coupons: "The negative callable bond is creating some technical difficulties. Jyske said it will initially be registered as a floating-rate bond until the systems of VP Securities, Denmark’s central securities depository, are adapted to handle negative coupons for fixed-rate bonds."
https://www.bloomberg.com/news/articles/2019-08-05/first-10-...
In case you think negative yields cannot happen, it is definitely possible. Many government and corporate bonds in Europe are trading at a price which is above the value of the nominal plus all the remaining coupons.
Germany has issued last month zero-coupon bonds which were sold above par and they are trading now at 106.87 euros (and the only thing you will get back if you hold them to maturity is 100 euros in 2029).
https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-de...
To be fair, I imagine it could still happen that these bonds have zero or positive yield if they are bought at more than a 5% discount, but in that case why would the issuer bother offering negative coupons in the first place?
This link shows loans available at my mortgage provider: https://netbank.totalkredit.dk/netbank/showStockExchange.do
Or maybe not, but the risk exists. With a negative-yielding bond at least you know what you’re getting (as long as there is no default!).
I don't think that's true? Can you explain what you mean? It's probably true that a total collapse won't be tolerated, just like a total collapse of the banking sector wouldn't be tolerated.
If investors didn’t trust banks, they would demand high interest rates when borrowing banks their money, just as they demand higher interest from those who want to make smaller down-payments on houses, or on credit card debts.
Looking at https://www.investing.com/rates-bonds/european-government-bo..., many European countries (even Spain and, short-term, Italy) can borrow money from the market at negative interest rates.
That must mean those borrowing them money must be confident they will get that money back (not that surprising, given that the ECB keeps printing money)
What a world we live in.
And true, even with negative rate this loans kurs plus fixed costs still mean you are still paying the bank more than they are loaning you.
This difference between the amount loaned and the amount paid back over the life of the loan is commonly referred to as "interest".
It really feels like they're just playing semantic games here. Any proper comparison of APRs would include both components. A true "negative interest rate mortgage" would be one where the bank pays you to borrow money, with the total amount borrowed being greater than the total amount paid back to the bank.
Workaround: don't be poor.
https://i.imgur.com/wF6PCnU.png
2019 is not over yet, so maybe it's a little higher this year.
This is only for "parcelhuse", which wikipedia defines as: "Single-family detached home".
Depending on where demand is, I'd expect more of that sort of thing too, if it's allowed. In the US, it is forbidden to build those kinds of homes in large areas of our cities.
Here is the graph for multistorey apartment buildings. I'm not smart enough to interpret what this means. In the big city I live in in Denmark, most new apartment buildings are luxury apartments and expensive as hell, so I don't think they are a result of rising house prices.
Looks like the graph kicked up in response to something... that's good, I guess.
> Høegh said Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers.
Negative bond rates happen when there is a surplus of capital looking for "safe havens". Some investors are willing to pay to have money placed safely for a number of years. The Danish real-estate bonds are regarded as a very safe haven.
Negative rates only happens when investors shy away from stocks and just want their money to be safe for the next 5-10 years. Investors are actually willing to pay just to have their money kept safely out of the stock market. What does that tell you?
There is so much volatility (read: Trump). Stocks can both go up and down with a tweet. Until the next day or 4 hours later. So investors flees stocks and look for safe bonds.
I as a home owner would be interested for a remortgage to stick in the stock market (or even a risk free investment). Not really a poor person option though.
This would presumably just inflate the/a housing bubble, which doesn't seem like it would inherently help poor people, you cant really liquidate the asset as you need to live in it. Second homes on the other hand....