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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

#91

Post by martin_bech »

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…

That actually isnt completely true.. Interest in Denmark are tax deductible, so + fees etc and after taxes, rates are effectively 0.58% to 1.51%.

This link shows loans available at my mortgage provider: https://netbank.totalkredit.dk/netbank/showStockExchange.do

Re: Danish bank launches negative interest rate mortgage

#92

Post by penagwin »

imtringued wrote: post #72
klipt wrote: post #44

Earlier quoted context omitted.

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.

> injecting money into the economy by lowering interest rates

But there's still interest rates? People still lose money by taking out a loan to buy a car.

The reason nobody takes a loan for groceries is because groceries are cheap! There's 0 point in taking a loan for groceries unless you literally have no other money.

Meanwhile many people can't afford to buy a car/house with cash, so they're forced to take a loan (and lose money in the long run)

Re: Danish bank launches negative interest rate mortgage

#93

Post by tom_mellior »

Whil- wrote: post #86
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…

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 infl…

Thanks for your comment. I was a bit intrigued, also in light of the sibling discussion, so I tried to look this up without spending too much time on it.

This document "How is inflation measured?" from the Riksbank: https://www.riksbank.se/globalassets/media/rapporter/ekonomi... doesn't give weights in general but does say this (emphasis mine): "the method in which housing costs for owner occupied housing are measured are an important source of non-comparability, partly because they make up a large proportion of the CPI (around 10 per cent in sweden)". Note the "owner occupied" part, so this isn't even just rents! But then I don't understand the rest of the discussion that follows this.

Also Statistics Sweden at https://www.scb.se/en/finding-statistics/statistics-by-subje... lists "Housing, water, electricity, and fuels" as one of the "main groups" in the CPI, though this only suggests but does not prove that housing does have a non-zero weight.

Re: Danish bank launches negative interest rate mortgage

#94

Post by martin_bech »

kgwgk wrote: post #90
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?

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!).

The issuer, “realkredit” actually covers defaults, so the bonds are very secure.

Re: Danish bank launches negative interest rate mortgage

#95

Post by kgwgk »

imtringued wrote: post #72
klipt wrote: post #44

Earlier quoted context omitted.

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.

In principle low rates increase economic activity, production, labor demand, wages and prices (but it’s true that the theory is not working well lately).

Re: Danish bank launches negative interest rate mortgage

#96

Post by nybble41 »

nabdab wrote: post #22
0x0 wrote: post #8

The effective interest seems to be above 0% though. The linked FAQ shows calculations where the total amount paid back is more than the total loan amount. Plus some talk about some kind of exchange rate(?) seems like this could be even riskier than normal?

The “Exchange rate” is the kurs(Danish) when the loan is for instance at kurs95 that means you only get 95% of the loaned amount. Effectively the investor gets a bigger principal than was actually loaned. Depending on invester pressure the kurs goes up, but It’s typically close at 100, and a lower rate loan is then opened up, since investing in a kurs100+ loan means taking an emidiate hit on the principal owed, which…

> Effectively the investor gets a bigger principal than was actually loaned.

This difference between the amount loaned and the amount paid back over the life of the loan is commonly referred to as "interest".

It really feels like they're just playing semantic games here. Any proper comparison of APRs would include both components. A true "negative interest rate mortgage" would be one where the bank pays you to borrow money, with the total amount borrowed being greater than the total amount paid back to the bank.

Re: Danish bank launches negative interest rate mortgage

#97

Post by kasey_junk »

jjwhitaker wrote: post #82
opportune wrote: post #61

Earlier quoted context omitted.

>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 econom…

> In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008.

Danish loans are definitely securitized and sold as investment tools. They are a classic interest rate risk hedge.

It’s been a while since I was adjacent to them but the bigger difference in Danish mortgage backed securities were a) no governmental guarantee on them b) less protections for the borrowers than in the US c) no derivatives d) much smaller market & e) much longer history.

So credit risk, which is what ratings agencies nominally judge is likely not a problem.

Interest rate risk is though, but given its more straight forward, it’s what investors are looking for exposure to & there is low leverage it’s unlikely to cause systemic collapse.

Re: Danish bank launches negative interest rate mortgage

#98

Post by zaroth »

klipt wrote: post #47
jjazwiecki wrote: post #21

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.…

Isn't that also why economists think excessive inflation is bad? Because it undermines the "time value of money"? 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.

Lower rates cause increased inflation. Rates are lowered by increasing the price of bonds, by buying them, e.g. "printing money".

Re: Danish bank launches negative interest rate mortgage

#99

Post by AJ007 »

planteen wrote: post #68
_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 econ…

It will be interesting to see what happens if the US ends up with negative interest rates. Japanese and EU banks won’t have assets they can buy to get yield from, nor will the US.

One could consider something like a Gold ETF where a percentage of the gold is sold every year to pay for the cost of storage as a negative interest rate cash alternative. You lose money every year too, but central banks can’t print it.

Re: Danish bank launches negative interest rate mortgage

#100

Post by ben509 »

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.

"The inflation rate" generally means CPI-U[1] in the US or some similar "basket of goods" in other areas. So, this is correct, as we're usually looking at urban consumers, it would include rent but not housing.

As another poster mentioned, though, inflation or deflation as general concepts can refer to any price or cost that increases or decreases.

[1]: https://www.bls.gov/news.release/cpi.t01.htm

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