If that happens house prices will go apeshit.
For example - if I have a 20 year mortgage on a $240,000 house @ 0%, I have to pay $1,000/month. If the interest rate is -1% then I have to pay ~$900/month. I don't know if that extra $100/month really moves the market on home prices that much.
$190,000 @ 5% interest
$210,000 @ 4% interest
$235,000 @ 3% interest
$275,000 @ 2% interest
$310,000 @ 1% interest
With negative rates the payments compound. If the interest rate is $900/month, you're paying off $1000/month in principal each month, and making $100/month in profit that is applied to the home equity. You can then go use that equity to take out another loan on the property, make $100/month in profit, repeat. Or go buy a different property with a different lender, if the bank starts getting suspicious. If you can't afford the increased payments...well, that's what a loan is for, particularly one that you're making a profit off. ;-)
a -1% rate on a mortgage with 20% down payment is effetely a 4% annual return on investment.
If you can make 10%/yr in the stock market. and your mortgage is 3%/yr you should be maxing out the loan already and putting your cash back into stocks to make the 7% difference, not another house, if mortgages are 0%, you are making 10%, If mortgages are -1% you are making 11%, ect
The downsides to this strategy in a negative interest rate scenario are the same as they are today: If all your capital is locked up in down payments, you are missing out on stock gains entirely. If all your capital is in the market, you are vulnerable to bubbles and swings there.
Same thing with bonds, mortgages, and loans: there's default risk.
Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you.
(It's also worth noting that there are a few risk-free assets that offer yields higher than 0%: U.S. Treasuries, and U.S. savings accounts. And there is a predictable carry trade of firms borrowing at 0 in the EU, converting their Euros to dollars, and then depositing in the U.S. at > 0. The risk then becomes currency risk, the chance that the dollar will depreciate, which is also happening.)
I don't think this is accurate, as there is still risk because we are talking about a mortgage, not just a negative interest loan. A mortgage comes with down payment and a house for collateral. You can end up underwater on an interest free home mortgage just as easy as one with a positive mortgage. The only difference is your monthly payment is lower without mortgage interest.
Also, if you default on the mortgage, you are also out your 20% down payment.
The part I find interesting about the current situation is that stocks are sky high going higher, but loan interest is low. This indicates to me that banks and institutions are desperate to park money anywhere but the stock market despite the incredible market performance.
What does this mean? I am at a loss.
At the very least that increases demand for housing dramatically
On the other hand, 0% has no known special relationship with the housing market, so there's not really a good reason to expect substantially different behavior at that value compared to -.125% or +.125%.