Danish bank launches negative interest rate mortgage • Hacker News Board

Re: Danish bank launches negative interest rate mortgage

#71

Post by SilasX » Wed, Aug 14, 2019, 7:21 PM UTC

_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?

Money losing its value would be even worse for negative-nominal-rate lending. In a high/hyperinflationary environment, you'd look to hold easily stored goods that maintain their real value, and thus cancel inflation.

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.

Re: Danish bank launches negative interest rate mortgage

#72

Post by imtringued » Wed, Aug 14, 2019, 7:23 PM UTC

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!

The idea of injecting money into the economy by lowering interest rates works but people usually only get loans for houses or cars. No one buys their groceries with loans so they are ineffective at increasing prices in consumer goods and thereby lowering interest rates does not affect inflation despite the massive cash injection.

Re: Danish bank launches negative interest rate mortgage

#73

Post by FelixGommen » Wed, Aug 14, 2019, 7:29 PM UTC

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 :)

No. That is not the case. The negative interest in this case is for loans over 10 years. If you want to have it over 30 years you still have to pay one percent.

Re: Danish bank launches negative interest rate mortgage

#74

Post by _bxg1 » Wed, Aug 14, 2019, 7:30 PM UTC

SilasX wrote: post #71

_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?

Money losing its value would be even worse for negative-nominal-rate lending. In a high/hyperinflationary environment, you'd look to hold easily stored goods that maintain their real value, and thus cancel inflation. 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.

So in a hyperinflation scenario, money could be losing value faster than the negative interest rate, so you're basically paying someone else to take on that risk/loss.

That makes sense, although another commenter said inflation in Denmark is very low right now, so it doesn't seem to apply here.

Re: Danish bank launches negative interest rate mortgage

#75

Post by FelixGommen » Wed, Aug 14, 2019, 7:35 PM UTC

opportune wrote: post #61

olau wrote: post #29

Earlier 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…

>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

Well in principle yes, but in reality no. The Danish system for financing real estate have historically been extremely stable. Olau explains it above

Re: Danish bank launches negative interest rate mortgage

#76

Post by nabdab » Wed, Aug 14, 2019, 7:37 PM UTC

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?

People keep missing the rate. The effective annual rate of the loan is 2% because you don’t get the full amount payed out/ the principle is higher than the loaned amount.

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.

Re: Danish bank launches negative interest rate mortgage

#77

Post by MagnumOpus » Wed, Aug 14, 2019, 7:38 PM UTC

tom_mellior wrote: post #65

Whil- wrote: post #56

Earlier quoted context omitted.

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." an…

- Normally as in almost everywhere in the world (apart from a few places like Sweden I think?)

- 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.

Re: Danish bank launches negative interest rate mortgage

#78

Post by nabdab » Wed, Aug 14, 2019, 7:39 PM UTC

martin_bech wrote: post #37

buboard wrote: post #33

Earlier quoted context omitted.

this isn't free money

It actually is.. any morgage below infation, is free money..

This loans effective cost is above inflation. Inflation is in the 1-2% range and this is net at 2.1% There’s no free money just flashy marketing.

Re: Danish bank launches negative interest rate mortgage

#79

Post by SilasX » Wed, Aug 14, 2019, 7:41 PM UTC

_bxg1 wrote: post #74

SilasX wrote: post #71

Earlier quoted context omitted.

Money losing its value would be even worse for negative-nominal-rate lending. In a high/hyperinflationary environment, you'd look to hold easily stored goods that maintain their real value, and thus cancel inflation. 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.

So in a hyperinflation scenario, money could be losing value faster than the negative interest rate, so you're basically paying someone else to take on that risk/loss. That makes sense, although another commenter said inflation in Denmark is very low right now, so it doesn't seem to apply here.

>So in a hyperinflation scenario, money could be losing value faster than the negative interest rate, so you're basically paying someone else to take on that risk/loss.

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.

Re: Danish bank launches negative interest rate mortgage

#80

Post by mywittyname » Wed, Aug 14, 2019, 7:47 PM UTC

_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?

Well, the pile of money that exists is much, much smaller than the value of everything in the economy. So at some level, it's not possible to convert your holdings to cash and sit on it. You need to hold "cash" in the form of bonds.

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).