Denmark's Genius Housing Fix | Hacker News Reader

Denmark's Genius Housing Fix

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57 pointsjpurnell54 comments

I found the writing style of this article grating. The Danish system can be summed up in one sentence.

"Let home owners buy their mortgage from the bank for the net present value of the loan instead of the remaining principle".

In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.

> The latter option is valuable because when interest rates rise, the price of mortgages fall.

Can you explain how that works under this system?

Here is how I hear it personally; When interest rates rise, demand for other assets go down, which would include these mortgage bonds; which means it is now cheaper to buy your mortgage out due to reduced demand. Essentially your mortgage is now dynamically priced, in terms of extinguishing it; by the market. If so - sounds brilliant actually.

Especially because this would correctly price the change in time value of money changes - without such a system, people are incentivised to pay as slowly as possible when the interest rate on their loan is lower than the central bank rate.

In Denmark, with a realkredit loan. The loan is funded by bonds that investors buy. The realkredit institution manages these loans and makes sure the investors get paid back.

The refinancing part is essentially if the interest rates go up I can ask to pay those higher interest and bit more per month and then my total mortgage debt goes down. In some cases you can save a lot of money by doing that. It depends.

Also monthly payment is misleading. You pay quarterly not monthly. So its calculated maybe 10.000DKK monthly but you will always pay 30.000DKK quartely.

Don´t know why its always described as monthly in Denmark when no one pays realkredit on a monthly basis. It could be because the mortgage you can get is based on a monthly salary. But I am just guessing. No idea.

Its a good system though. IMHO Denmark is very much a delusional capitalist country with socialist tax rates but this realkredit system is really superb.

Can a foreigner buy these 'realkredits'?

Yes, but I'm not sure why you would.

He means that the price of the bonds backing the mortgage fall. Since the bonds are fixed interest, when interest rates rise, new bonds at a higher interest rate are more profitable than the old bonds at a lower interest rate. As such the free market price of the old bonds will drop to until the selling-at-a-loss reaches an equilibrium with the expected increased profit from higher interest rates of the new bonds over the lifetime of the bond.

This lets the loan taker buy back their own bonds for less than what they were paid (the loaned amount) when the bonds were issued.

Yup exactly this. If you go to "normal" bonds, there's many articles describing the idea, e.g. https://www.schwab.com/learn/story/what-happens-to-bonds-whe...

But basically:

Say a bond was originally worth say $100 and generated $10 of income in time T (10%). If interest rates rise so that $100 will now generate $20 (20%), then the original bond is worth less to a buyer. If we ignore the time delta, that bond would only really be worth $50 ($50 to generate $10 is the same 20%), so it's half as valuable. (The time change would bring it somewhere in between, depending on how long has elapsed).

Instead of the complexity of issuing these bonds, would it not be a lot simpler to just allow borrowers to buy back their mortgage at its current value, which is what any other buyer of that loan would do. Mortgage loans are bought and sold all the time, for their current value. Just allow the original borrower be able to do that.

Both are forcing the bank to take action, but I think that switching like for like is less of an imposition than a forcing the bank to sell.

It is interesting that banks dont already offer this for a fee. Im not too knowledgeable on the topic, but wonder if it has do with how mortgages are bundled, and the cost/paperwork of unwinding that.

The fact that someone who needs to sell will pay back the principal is valuable to the bank. If a bank starts offering the option to get out of the loan at a lower price, it would impair the value of that loan. The only way to make this happen would be to include it in the original terms of the loan (where this feature would be worked into the market math that sets the interest rate) or if the government changes the rules (which would result in a hole in balance sheets as the value of the debt falls).

Correct, there is some additional value from the upside that mortgage holders may need pay in full to terminate.

However, this upside should be priced into the Mortgage price on the secondary market as well.

there are other factors as well, like holders of mortgages may care about much more than their market value. They are balancing time returns, risks, and their portfolio of investments.

How would the current value be determined? The lender has no incentive to offer you a competitive price, when your alternative is to pay the loan in full.

The point of the Danish system is that it's a market system through and through. No one needs to twist the arms of lenders to make them "allow" something.

There is a straightforward way to value a mortgage loan because they are bought and sold every day.

The value calculation might have to change, as noted by fshbbdssbbgdd, but it's possible, since the Danish system calculates a value on the bonds that represent the mortgage. To me it seems like less overhead to forego the step of issuing the bonds and just make the mortgage work like the bonds would.

I'll admit that I'm in well over my head here. I'm no banker, and I've never had a realkredit loan myself. But here goes.

I believe the difference is that mortgages are tied to the individual property, and thus individually priced, whereas building bonds are part of an emission series. That means there's a liquid market, where all you have to do to pay back the loan is buy your bond type, not the particular bond for your property.

And that makes it different from a mortgage that is a contract between a single lender and a single borrower. There, you are stuck doing business with whomever owns the contract, and they can use that against you when negotiating the price.

I'm not that experienced with it either, but a mortgage loan is just a secured loan. The primary value driver is that it's a stream of payments for a defined period of time, probably boosted by the fact that it's secured but also reduced by the fact that it can be paid off at any time. I'm sure there's more to it than that, but fundamentally it's just a debt that can be bought and sold for something close to its net present value of its future cash flows, like any other bond or debt.

Don’t plagiarize.

https://marginalrevolution.com/marginalrevolution/2024/06/mo...

> “buy the matching bond”

I don’t get it. If you could afford to buy out the bond, then why would you need a mortgage in the first place??

Well. First of. Maybe you didn't have the money at that particular time. In Denmark every single mortage has a matching bond.

I'll try to explain it as well as I can.

When you make a mortgage loan you can have either a fixed rate or variable rate. Depending on which you choose the exchange-rate differs. It hovers around 100. When you make a loan you would want that to be 100 or more. For example if the exchange-rate was 101 you would receive 101 kroners for every 100 kroner you loan. A dream scenario. But more realistically it is probably closer to 99.

Mortgages is a boring thing. But extremely interesting when it comes to your own loan. The key to take away here is the following:

When the mortgage rates are high the bonds are less valuable.

When the mortgage rates are low the bonds are more valuable.

Now let's take an example. I take 1.000.000 DKK loan for a house at an exchange-rate of 100.00DKK. Meaning I now owe the mortgage institute 1.000.000 DKK.

The mortgage security bond for my house is still 100.00 DKK at this time. Meaning if I want to payout my loan. I have to pay 100.00 DKK to pay off 100.00DK. But for if the rates are high then the exchange-rate might be 95. In which case I can then go down to the bank and say 'I want out of my loan'. The bank will then say 'Okay. You still owe the mortgage institution 1.000.000 and since the exchange-rate is 95 right now. You then have to pay 950.000 plus some fees'. The bank will then buy the underlying bond for me and handle the rest.

In general we have many options when it comes to mortgages. It all involves refinancing:

* If the rate falls you can do a down conversion. You replace your old loan with a new one with lower rate. You might have to pay more to payout the loan since the exchange-rate will certainly be higher.

* If the rate falls you can do an up conversion. Similar to the example before. But this time you replace the loan. You get a higher rate, but you might "pay off" a significant amount.

Hope that sort of clears it up.

And then there is the 'slanted' conversion where you refinance from a fixed mortgage to a variable mortgage. Or vice versa.

In all cases it depends on your situation. How many years are left on the loan. Have your disposable income changed such that you can pay off more in which do you want to change the loean from a 30 year loan to 10 year loean instead.

It takes some serious thinking.

If I already have a Fannie/freddie loan - why not allow me to maintain the same rate for the remaining loan and have the new interest rates for any delta. This would encourage movement without all the complexity of this scheme.

The money is already owed to the these entities at that rate. Allow folks to keep the rate on that amount even if they move.

It's owed to these entities at that rate for a specific amount of time. Swapping homes should then mean that the new home is on a payment timeline of whatever the remaining term is, not reset to 30 years. You'd also need to have not increased the loan amount for the math to work out, so either you'd need to sell the old home for more than what the new one costs, or come up with the difference in cash. On top of that, the original loan is backed with the old home as collateral, so the new home would also need to be worth at least as much as the remaining balance.

Yes - I don’t disagree. But provided those conditions are met I’m sure a blended rate could be arrived at that is much lower than market rate.

If the goal is to make it easier to move I think there are options. But I don’t see anyone rushing to exchange a 2.65% loan for 8%. I mean at that rate it makes more sense to rent your home than to sell it.

This blending rate would just be subsidizing the have's at the expense of the have nots. It would be a market advantage to existing low rate holders going into the next 2 decades.

The have’s are at heavily subsidized levels anyway. Anyone who could locked in a low rate in 2020, 2021 and early 2022. I don’t think they intend to move or sell unless the rates are in their favor. Blending allows for that to be possible in a gradual manner. Otherwise we are looking at real estate gridlock for a very long time.

Blending is obviously politically uncomfortable. However, the “have’s” are already at a massive advantage.

The fact that some people payoff early factors into the market value of mortgage debt, and therefore the interest rate that is offered. So if it were easier to transfer the debt when moving, the risk profile would be different, and the rate you got in the first place would be different.

This is brilliant.

But I needed to go find out a better description for my luddite self

Heres how using a bond backed mortgage causes the mortgage to become cheaper during interest rate rises

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* How Interest Rates Affect Present Value *

The interest rate is a key factor in calculating present value. A lower interest rate means future money is almost as good as money today because you can’t earn much interest. A higher interest rate means future money is worth a lot less because you could earn more interest with today’s money.

* Example *

1. Initial Mortgage Calculation:

- You have a $500,000 mortgage.

- You are paying it back over 30 years with a fixed monthly payment of $2108.

- The interest rate is 3%.

2. Interest Rate Change:

- Suppose the interest rate goes up to 6%.

3. Impact on Present Value:

When interest rates increase, the present value of those fixed monthly payments decreases. This is because if you were to invest money today at a 6% interest rate, you’d earn more on that investment than at 3%. Therefore, future payments are worth less because you’re missing out on that higher interest.

This document explains the Danish system in some detail: https://finansdanmark.dk/media/raim0hhz/den-klassiske-realkr....

Toward the end of the document, there is a discussion of how the Danish mortgage system has fared in the various financial crises of the past 50 years starting with the twin oil shocks of the 1970s. Evidently it has been much more stable than the US system during that era. If for no other reason, the US should look at this system seriously.

It does sound like a good system since it gives the homeowner more flexibility. But call options aren’t free, so I wonder if it also makes getting a mortgage a little more expensive?

The mortgage becomes a bond that’s less valuable to the investor, so they would want a higher interest rate up front to make up for it.

This seems like it might give investors flexibility as well. What does it mean for long-term investments if people start paying their mortgages early?

People often do pay off mortgages early, for example when they move. This option would let them do it cheaper, making it more attractive.

My DK friends say that housing prices in København are outrageous. Did the genius fix work only locally?

Most countries outside of the US also have a "fix" for this specific problem just by not having 30 year fixed rate mortgages. For example in Canada most fixed rate mortgages are only fixed for 5 years. So we don't have the mortgage lock in effect that the US has, but that's only one cause out of dozens for outrageous housing prices.

As I understand it, the Canada housing market is significantly more broken than the US one overall:

https://awealthofcommonsense.com/2023/09/the-u-s-housing-mar...

Also, isn't there now a massive concern about large scale loan defaults and bankruptcies the next time mortgage rates reset in Canada?

Structurally, the Canadian housing market is much less broken than the US, IMO. Toronto and Vancouver are adding housing at rates unparalleled in any US city outside of Texas.

But Canada also has population growth ~10X that of the US.

Thank fuck my mortgage rate is locked in. I refinanced when rates were at rock bottom, I'd hate to see what my mortgage payment would look like today if my bank was allowed to raise it.

That's the Canadian system, have to renew your rate every 5 years. It's great for the banks. The tighter regulations helped Canada avoid the underwater mortgage fiasco of the US in 2008/2009, but mostly it's just a really good deal for the banks. :)

You guys have 30 year fixed rate mortgages???? How the hell can that work? How can banks predict with any accuracy the interest rates for that kind of period?

I had a 3-year fixed rate mortgage some 5 years ago, fixed at the rate of the time which was historically extremely low (below 2% pa), before the interest rates skyrocketed, and was really happy :D I had a couple of years on those rates... but then I went to re-negotiate and it was best to get just floating rates as the banks were all panicking and would only freeze rates for 3 years at outrageous levels... I think I got floating rates at around 3.5% or 4.0% (it has gone down since). I imagine it would be extremely dangerous for a bank to just have frozen my rates for 30 years anywhere near that historical low, so you would have to pay a huge margin for them to take that risk , no?

At the bottom of the rate curve a few years ago a 30 year fixed rate was 2.8%, a 5/1 adjustable rate was 2.5%, and a 15 year fixed was 2.1%.

The federal government buys a significant percentage of these loans and eats the interest rate risk. It’s a direct subsidy.

Did you know that the US has one of the best income-to-housing-price ratios in the world?

I don't think there is one major/capital European city that doesn't have outrageous prices right now, at least from what I've seen.

That shouldn't stop us from finding solutions to similar issues outside of the major cities like Copenhagen, even if the problem isn't as noticeable in the country-side or minor cities.

Because the real cause of high housing prices is too little housing supply (relative to demand).

This "genius fix" does nothing to help that.

The solution is to Build. More. Housing.

Build more _multi family_ housing and make it cheaper by doing away ridiculous parking spot requirements and outdated fire codes.

There are literally dozens of causes for high housing prices. Any one fix is not enough.

For example, the Ontario Housing Task Force had 55 recommendations, and that's only for the issues of provincial responsibility.

Here's the recommendations - https://www.ontario.ca/page/housing-affordability-task-force...

#1 is Set a goal of building 1.5 million new homes in ten years. #2 is ... set “growth in the full spectrum of housing supply” ... as the most important residential housing priorities... #3 is ... Allow “as of right” residential housing up to four units and up to four storeys on a single residential lot. ...

etc.

So a lot of these boil down to build more houses / let people build more houses.

This article isn't about the price of a house, it's the price of the money you use to buy the house.

It’s the same problem in every desirable major city in the world, especially if you do relative comparisons within the country. Demand won’t die unless we start seeing widespread depopulation that can’t be offset through immigration, and from the supply side, it’s in the best interest of the homeowners (majority of the voter base) to keep the prices high. Basically, our best bet is to slow down the housing inflation, rather than deflation. Since it won’t happen easily, and if it happens, there will be bigger and worse problems.

I might be wrong, but that’s what I gather while renting in one of the hot spots of extreme housing prices (Vancouver).

Another description, from 2023: https://marginalrevolution.com/marginalrevolution/2023/03/in...

In New Zealand, a fixed rate mortgage is very much linked to the bond. If you repay early, what happens depends on what has happened to the interest rate - there is an early repayment penalty if the interest rate drops.

https://www.bnz.co.nz/support/home-loans/managing-your-loan/...

Etrade offered portable mortgages in 2003: https://www.nytimes.com/2024/05/06/opinion/portable-mortgage...

> Fewer sellers means buyers compete for a smaller pool of available homes, driving up prices

Uh? This is just moving the tokens around. Those sellers are still going to live somewhere, so they're either going to buy again or enter the rental market. So the "pool of available homes" is not improved by this maneuver, like, at all. At best the buyer and seller for a given transaction end up just trading places and renting-vs-owning availability wobbles transiently by a minor amount.

There is another tried and true method for increasing the pool of available homes though. It's called building more homes.

> trading places

Sounds like socialism with extra steps.

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