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Danish bank launches negative interest rate mortgage

theguardian.com

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Re: Danish bank launches negative interest rate mortgage

#61

Post by opportune »

olau wrote: post #29
apo wrote: post #4

This 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…

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…

>These bonds are considered to be very stable, about the same quality as state bonds

>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

Re: Danish bank launches negative interest rate mortgage

#62

Post by scandinavian »

davidw wrote: post #25
UnFleshedOne wrote: post #14

Earlier quoted context omitted.

Poor people are screwed up regardless -- if rates are high, they can't afford payments, if rates are low, prices rise and they still can't afford payments. Not to mention getting downpayment. Workaround: don't be poor.

Do rising prices spur the construction of more homes in Denmark?

Seems pretty steady:

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".

Re: Danish bank launches negative interest rate mortgage

#64

Post by Areading314 »

klipt wrote: post #44
pontifk8r wrote: post #40

It 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!

kind of the opposite of stagflation

deflecitation

Re: Danish bank launches negative interest rate mortgage

#65

Post by tom_mellior »

Whil- wrote: post #56
tom_mellior wrote: post #53

Earlier quoted context omitted.

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.

"Normally" as in Denmark, or "normally" as in "anywhere in the world", or for some other meaning of "normally"? Why wouldn't it be if inflation is meant to be a measure of changes in the expenses of average households?

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
Some things do get cheaper over time (like consumer electronics, sometimes), but others not so much.

Re: Danish bank launches negative interest rate mortgage

#66

Post by davidw »

scandinavian wrote: post #62
davidw wrote: post #25

Earlier quoted context omitted.

Do rising prices spur the construction of more homes in Denmark?

Seems pretty steady: 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".

Homes come in a lot of shapes and sizes though - in Italy where I lived for a number of years, it's pretty common for people to live in a flat in a 4/6/8/whatever unit building, either as owners or renters.

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.

Re: Danish bank launches negative interest rate mortgage

#67

Post by joshuaheard »

martin_bech wrote: post #35
jonplackett wrote: post #27

Can someone explain simply how they make money doing this? Or how the institutional investors they mention make money?

Ill try.. danish morgages are based on bonds, just like government bonds, but realestate instaed. So the issuer just takes a small cut, dosent matter for them if rates are 10% or negatve 1%, (they take about 0,6%). 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…

Why don't they buy gold or some other asset that does not lose money like this?

Re: Danish bank launches negative interest rate mortgage

#68

Post by planteen »

_bxg1 wrote: post #59

Is 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?

It doesn't mean the paper is worthless. On the contrary, the paper is more valuable than many other investment means. You are effectively paying a bank to guard your money with a negative rate, which makes sense. Guarding and protecting currency is not an easy task for an individual or business.

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.

Re: Danish bank launches negative interest rate mortgage

#69

Post by planteen »

NKCSS wrote: post #43
kgwgk wrote: post #19

Not really. “As a result, oddities now abound. Danish lender Jyske Bank last week issued a 10-year mortgage bond at an interest rate of minus 0.5 per cent, meaning homeowners are being paid to borrow.” 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.c…

Don't forget the mortage runs for 30 years and after 10 years, you are forced to pay the rate at that moment... so in the end, it will be ok :)

Could you refinance in say 5 years if rates were still negative then to get locked into 15 years of negative interest rates? Not sure on the mortgage market in Denmark, but in the US, refinancing mortgages common and is an industry of its own.

Re: Danish bank launches negative interest rate mortgage

#70

Post by tlb »

joshuaheard wrote: post #67
martin_bech wrote: post #35

Earlier quoted context omitted.

Ill try.. danish morgages are based on bonds, just like government bonds, but realestate instaed. So the issuer just takes a small cut, dosent matter for them if rates are 10% or negatve 1%, (they take about 0,6%). 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…

Why don't they buy gold or some other asset that does not lose money like this?

The cost of storing gold isn't zero. If you have $100M of gold, you have to prevent serious organized criminals from stealing it. That can cost $500k/yr (ie, -0.5% return) for 3 shifts of security and a vault, cameras, insurance, etc.

Brinks will store it for you for 0.72%/yr. https://goldsilver.com/vault-storage/

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