North European countries are a template of success. And this is just another example of it.
Danish bank launches negative interest rate mortgage
51–60 of 152 posts
Re: Danish bank launches negative interest rate mortgage
#52Negative interest rate will increase house asset prices as you will get money to loan. When there will be inflation due to outside forces a lot of home owners will have loans under water. The banks will be saved and there will be new regulation promising never again. Until the next bank crisis for different reason and so on.
I think you get the effect wrong. 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.
Thanks insightful comment. Increasing inflation will help pay of the loan as it will get lower through inflation.
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.
Re: Danish bank launches negative interest rate mortgage
#53This is all the more surprising given that inflation in Denmark is running ~1%/year. 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 loo…
Your housing index link seems to say that housing prices increased by 4% per year over the last two years (looking at the differences Jan 2017-Jan 2018-Jan 2019 [edit: clicking "10Y" shows essentially the same trend since 2012]). So unless nothing else in the economy increased in price over this period, I would say that whoever calculated a 1% inflation rate did not weight housing costs adequately.
Re: Danish bank launches negative interest rate mortgage
#54Earlier quoted context omitted.
Poor people don't always have the means to save to afford the 10-30% down payment, so they cannot benefit from the cheap mortgage rates.
In Denmark the required downpayment is 5%, up from 0 a few years ago.
Same in the US effectively. You will have to pay extra for mortgage insurance but I think the 20% notion is long dead.
Re: Danish bank launches negative interest rate mortgage
#55Earlier quoted context omitted.
For poor people it means that your rent continues to rise, house prices become further inflated and you will still pay massive interest rates if you get a consumer loan.
In Denmark the rents are not free market so they can't just rise with house prices.
What can they rise with? Some official inflation rate? Does the calculation of that inflation rate include house prices?
Re: Danish bank launches negative interest rate mortgage
#56This is all the more surprising given that inflation in Denmark is running ~1%/year. 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 loo…
Your housing index link seems to say that housing prices increased by 4% per year over the last two years (looking at the differences Jan 2017-Jan 2018-Jan 2019 [edit: clicking "10Y" shows essentially the same trend since 2012]). So unless nothing else in the economy increased in price over this period, I would say that whoever calculated a 1% inflation rate did not weight housing costs adequately.
Housing prices normally aren't a part of the inflation calculation.
Re: Danish bank launches negative interest rate mortgage
#57Earlier quoted context omitted.
I think you get the effect wrong. 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.
Thanks insightful comment. Increasing inflation will help pay of the loan as it will get lower through inflation. 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 chea…
The problem is not that lowering the interest rate has stopped increasing inflation, it's that central banks can't lower real rates enough. They are facing so called zero lower bound problem: https://www.investopedia.com/terms/z/zero-bound.asp This is called liquidity trap.
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.
Re: Danish bank launches negative interest rate mortgage
#58It seems like a (cynical?) way to turn today's overpriced real estate assets into a stream of payments. Someone purchasing a home for DKK 300K with no interest may think they're getting a deal, until they try to resell that home and find out they cannot sell it for more than DKK 240K.
That would imply we're getting into a weird deflationary regime where money shrinks under negative interest rates, yet still buys more in the future!
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Re: Danish bank launches negative interest rate mortgage
#59Is this good or bad? I don't understand how this can happen unless money itself loses nearly all value (i.e. storing the paper isn't even worth it, like in Germany after WWI). Can someone explain further?
Re: Danish bank launches negative interest rate mortgage
#60Earlier quoted context omitted.
Some background: In Denmark, mortgages for housing are handled by special real-estate lenders (realkreditinstitutter) who issue bonds and handles defaults. 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…
And yes, the negative interest rate at the Danish central bank does translate to negative interest rates for deposits. Not yet for consumers, but corporate accounts have negative rates.
Negative central bank rates are an attempt to spur consumption via all of the stimulus created since the financial crisis. Banks have been loath to pass on these negative rates to depositors because no one wants to be the first bank to do so, as depositors would flee that bank for another bank that was still eating the negative interest rate. However, the banks legally cannot coordinate actions as that would be evidence of cartel behavior. So they have just eaten the losses thus far.
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.