Denmark's Genius Housing Fix
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Denmark's Genius Housing Fix
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Re: Denmark's Genius Housing Fix
#2In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
Re: Denmark's Genius Housing Fix
#3In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
> The latter option is valuable because when interest rates rise, the price of mortgages fall.
Can you explain how that works under this system?
Re: Denmark's Genius Housing Fix
#4Another description, from 2023: https://marginalrevolution.com/marginalrevolution/2023/03/in...
Re: Denmark's Genius Housing Fix
#5> Fewer sellers means buyers compete for a smaller pool of available homes, driving up prices
Uh? This is just moving the tokens around. Those sellers are still going to live somewhere, so they're either going to buy again or enter the rental market. So the "pool of available homes" is not improved by this maneuver, like, at all. At best the buyer and seller for a given transaction end up just trading places and renting-vs-owning availability wobbles transiently by a minor amount.
There is another tried and true method for increasing the pool of available homes though. It's called building more homes.
Re: Denmark's Genius Housing Fix
#6In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
> The latter option is valuable because when interest rates rise, the price of mortgages fall. Can you explain how that works under this system?
Here is how I hear it personally;
When interest rates rise, demand for other assets go down, which would include these mortgage bonds; which means it is now cheaper to buy your mortgage out due to reduced demand.
Essentially your mortgage is now dynamically priced, in terms of extinguishing it; by the market.
If so - sounds brilliant actually.
Especially because this would correctly price the change in time value of money changes - without such a system, people are incentivised to pay as slowly as possible when the interest rate on their loan is lower than the central bank rate.
Re: Denmark's Genius Housing Fix
#7This is brilliant.
But I needed to go find out a better description for my luddite self
Heres how using a bond backed mortgage causes the mortgage to become cheaper during interest rate rises
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* How Interest Rates Affect Present Value *
The interest rate is a key factor in calculating present value. A lower interest rate means future money is almost as good as money today because you can’t earn much interest. A higher interest rate means future money is worth a lot less because you could earn more interest with today’s money.
* Example *
1. Initial Mortgage Calculation:
- You have a $500,000 mortgage.
- You are paying it back over 30 years with a fixed monthly payment of $2108.
- The interest rate is 3%.
2. Interest Rate Change:
- Suppose the interest rate goes up to 6%.
3. Impact on Present Value:
When interest rates increase, the present value of those fixed monthly payments decreases. This is because if you were to invest money today at a 6% interest rate, you’d earn more on that investment than at 3%. Therefore, future payments are worth less because you’re missing out on that higher interest.
Re: Denmark's Genius Housing Fix
#8In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
> The latter option is valuable because when interest rates rise, the price of mortgages fall. Can you explain how that works under this system?
In Denmark, with a realkredit loan. The loan is funded by bonds that investors buy. The realkredit institution manages these loans and makes sure the investors get paid back.
The refinancing part is essentially if the interest rates go up I can ask to pay those higher interest and bit more per month and then my total mortgage debt goes down. In some cases you can save a lot of money by doing that. It depends.
Also monthly payment is misleading. You pay quarterly not monthly. So its calculated maybe 10.000DKK monthly but you will always pay 30.000DKK quartely.
Don´t know why its always described as monthly in Denmark when no one pays realkredit on a monthly basis. It could be because the mortgage you can get is based on a monthly salary. But I am just guessing. No idea.
Its a good system though. IMHO Denmark is very much a delusional capitalist country with socialist tax rates but this realkredit system is really superb.
Re: Denmark's Genius Housing Fix
#9> Fewer sellers means buyers compete for a smaller pool of available homes, driving up prices Uh? This is just moving the tokens around. Those sellers are still going to live somewhere, so they're either going to buy again or enter the rental market. So the "pool of available homes" is not improved by this maneuver, like, at all. At best the buyer and seller for a given transaction end up just trading places and rent…
> trading places
Sounds like socialism with extra steps.
Re: Denmark's Genius Housing Fix
#10My DK friends say that housing prices in København are outrageous. Did the genius fix work only locally?