41–50 of 152 posts
Earlier quoted context omitted.
this isn't free money
It actually is.. any morgage below infation, is free money..
Danish mortgage bonds are effectively guaranteed by the Danish state and there are only a few actual government bonds in circulation. The interest rates go below 0 because investors don't trust banks with their money.
If investors didn’t trust banks, they would demand high interest rates when borrowing banks their money, just as they demand higher interest from those who want to make smaller down-payments on houses, or on credit card debts.
Looking at https://www.investing.com/rates-bonds/european-government-bo..., many European countries (even Spain and, short-term, Italy) can borrow money from the market at negative interest rates.
That must mean those borrowing them money must be confident they will get that money back (not that surprising, given that the ECB keeps printing money)
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…
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.
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…
Cheaper debt means people take out larger debt to continue buying houses at market rate. Housing supply continues to deplete and people continue to pay a premium as more expensive houses are the only thing on the market. Lending drying up for the non-capital class will deteriorate the housing market.
I think a lot of headlines and people are conflating the negative interest rates with other unrelated signs.
Just listened to this Bloomberg podcast, where they interviewed Viktor Shvets on the meaning/implications/future of negative interest rates: https://www.bloomberg.com/news/audio/2019-08-09/what-negativ... > He argues that undermining the ’time value’ of money–or the principle that money available now is worth more than money in the future because you can use it to earn additional money–won’t lead to economic growth.…
So to avoid inflation, instead of printing money, we lower interest rates.
But once interest rates go below 0, that also undermines the time value of money.
Oops.
Negative 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.
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.
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 :)