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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

#81

Post by scandinavian »

davidw wrote: post #66
scandinavian wrote: post #62

Earlier quoted context omitted.

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.

https://i.imgur.com/2iCJllW.png

Here is the graph for multistorey apartment buildings. I'm not smart enough to interpret what this means. In the big city I live in in Denmark, most new apartment buildings are luxury apartments and expensive as hell, so I don't think they are a result of rising house prices.

Re: Danish bank launches negative interest rate mortgage

#82

Post by jjwhitaker »

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

It's a gross simplification, but with the volume that is Danish housing vs demand for said housing the risk is very low.

One of many issues leading into the 2008 crash was how Us mortgages were bundled, rated AAA, then resold as an investment tool. However, the ratings were falsely boosted to promote investment and when the underlying junk mortgages fell through and demand fell off a cliff with the rest of the economy there was no way to flip foreclosed housing to make up losses.

In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008. Current US auto loans may be much more similar than these Danish loans.

Re: Danish bank launches negative interest rate mortgage

#83

Post by davidw »

scandinavian wrote: post #81
davidw wrote: post #66

Earlier quoted context omitted.

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.

https://i.imgur.com/2iCJllW.png Here is the graph for multistorey apartment buildings. I'm not smart enough to interpret what this means. In the big city I live in in Denmark, most new apartment buildings are luxury apartments and expensive as hell, so I don't think they are a result of rising house prices.

In general, new construction is expensive, but if you cut off that supply, people with money just bid up prices on older housing.

Looks like the graph kicked up in response to something... that's good, I guess.

Re: Danish bank launches negative interest rate mortgage

#84

Post by tom_mellior »

MagnumOpus wrote: post #77
tom_mellior wrote: post #65

Earlier quoted context omitted.

"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…

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

Aren't you contradicting yourself when you go on to say that both the US BLS and Eurostat do include housing in their indices?

> statisticians either only include rents [or] “owners equivalent rent”

OK. So housing is part of the CPI, yes?

If I understand https://www.ecb.europa.eu/stats/ecb_statistics/escb/html/tab... correctly, Eurostat weights "actual rentals paid by tenants" at 6.1%. (edit: ECB, not Eurostat)

> none of it is house prices

This is the first mention of "house prices" in this thread. The index linked in the ancestor comment called itself "housing", not "house prices". Good for you if you insist on making the difference, but then if you make the difference you are not talking about the thing I was talking about, I think.

Also, some of it is house prices if house prices factor into the "owners equivalent rent", or is that made up out of thin air? Also, rising house prices cause rising rents, so indirectly they are represented anyway.

Re: Danish bank launches negative interest rate mortgage

#85

Post by dfawcus »

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…

That sounds similar to how Mortgages used to work in the UK in the 60s.

One would get a mortgage from a Building Society for around 75% of the property value, and had to get a Bank Loan for the remainder which they couldn't cover from savings.

Re: Danish bank launches negative interest rate mortgage

#86

Post by Whil- »

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…

This is without up to date fact checking so take this with a grain of salt, but during the last housing crisis I remember looking this up and came to the conclusion above. I don't actually know if it's universal but it was valid for Sweden at that point in time. I think the key word in your text above is "expenditure", where a house maybe isn't seen as an expenditure but rather an investment..?

When taking about inflation it's also always good to remind one self that the pool of money also changes. And the fact that housing usually is connected to mortgages, which in turn expands the amount of available money. But this paragraph has nothing to do with your comment so I'll just stop there!

Re: Danish bank launches negative interest rate mortgage

#87

Post by greycol »

planteen wrote: post #69
NKCSS wrote: post #43

Earlier quoted context omitted.

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.

Generally a fixed term has a worse rate for the borrower than the floating rate (assuming the floating rate isn't expected to change hugely in the future).

As a rule of thumb if you refinance from a fixed rate to a better rate you have to pay penalty fees if the rate is worse for the lender (better for you) relative to how much the lender would have made off you if the loan had continued at the previous rate. Because of this it only really makes sense if you can save money on the loan due to other factors that current market rate i.e. being able to pay of your mortgage at a faster rate, your credit rating has improved (or equivalent lending criteria), the lender is noncompetitive compared to the rest of the market, you believe the floating rate will decrease further in the short term and want to refinance to a floating rate before the penalties increase to match (though you'd be outguessing the rest of the market).

Refinancing from a floating rate or a fixed rate that is better(for you) than the market rate will have no or low penalties as your basically already paying market rate or worse and the lender has little downside in getting their money back.

So realistically if you believe that in 5 years the interest rate will be the same or lower you should be floating (or at least negotiating 5 years fixed instead of 10) and then you could negotiate for a lock in at that time.

Re: Danish bank launches negative interest rate mortgage

#88

Post by gridlockd »

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…

> low inflation and red-hot housing market.

The more reasonable way to look at it is that it is high inflation and a weak housing market. If the housing market was so hot, why would interest have to drop below zero?

Rather, houses are extremely expensive because money for houses (i.e. mortgages) is extremely cheap.

Re: Danish bank launches negative interest rate mortgage

#89

Post by kgwgk »

nabdab wrote: post #76
joshuaheard wrote: post #67

Earlier quoted context omitted.

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…

> investors still get more money back than they invest

No, they don’t. That’s the point. The reference rate is negative because the investors are buying bonds which will lose money.

Re: Danish bank launches negative interest rate mortgage

#90

Post by kgwgk »

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?

Other assets lose money in other ways :-)

Or maybe not, but the risk exists. With a negative-yielding bond at least you know what you’re getting (as long as there is no default!).

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