Negative Interest Mortgage Watch

[Silverfinger]

Market rates for German mortgage refinancing this Thursday (August 4, 2016; data source: Deutsche Bundesbank [German Federal Reserve Bank] - see links at bottom of post):

4 to 5 years: -0.16%
6 to 7 years: -0.03%.

And the trend is down. So, I predict, that sooner or later this will feed into actual rates, i.e. sooner or later, if that trend continues, German short term mortgage rates will turn negative.

As I wrote elsewhere, I don't think the UK will be immune to this folly.

I will use this thread to post updates on the siuation in Germany every now and then, but I think it could also serve to monitor the UK situation and for a more general discussion about the impact of negative rates on the UK house market, or property markets in general. For instance, will BTLers soon enjoy negative IO mortgages? Getting paid for further inflating the market and for accepting a certain risk?

IMO, this (negative interest on mortgages) is just a logical consquence of inflating the global bubble beyond anything a rational investor would have ever expected to happen.

If you don't think this will happen, then my advice is: think twice.

Data sources (direct):

Time series BBK01.WT4629: Yields on debt securities outstanding issued by residents /Mortgage Pfandbriefe / Mean residual maturity of more than 4 and up to 5 years / Daily data

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/its_details_value_node.html?tsId=BBK01.WT4629

Time series BBK01.WT4631: Yields on debt securities outstanding issued by residents /Mortgage Pfandbriefe / Mean residual maturity of more than 6 and up to 7 years / Daily data

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/its_details_value_node.html?tsId=BBK01.WT4631

Edited August 7, 2016 by Silverfinger

[VeryMeanReversion]

For instance, will BTLers soon enjoy negative IO mortgages? Getting paid for further inflating the market and for accepting a certain risk?

I was talking about this issue with a BTL'r back in the early 2000's. I said that with IO mortgages, as interest rates went to zero, house prices should go to infinity. You are being paid to hold an income producing asset, far more than the maintenance cost. The problem is when the interests go up again.

I don't think BTL'rs ever consider the risk they are taking.

[Bear Goggles]

The 'non-financial' problem I see with negative rates is that it exposes the fraud to the man in the street in a way that hasn't happened before.

As soon as the bank starts (in nominal terms) charging you to hold money, or starts paying you to take a loan, then there can be no hiding from the fact that a theft is going on.

It cuts across the generations too, the young will be paying the bank to 'look after' their hard earned wages, and the bank will pay their landlord to take a loan on the house they can't afford. The boomers are trying to buy an annuity or keep their savings in a safe place, these are things they see as their birth right, they're not going to like the banks taking a sizeable cut. So whatever the financial implications of negative rates, if they ever feed through to the consumer via mortgages or bank account interest, I think there'll be a significant political backlash. The perception will be of theft, pure and simple, and people will demand that the government 'do something'. I'm pretty sure the government and the banks are aware of this to a certain extent, and post Brexit, Corbyn, and various other consequences of sacrificing politics on the alter of economic dogma, are finally starting to worry about it.

Logically, if they start paying you to take on a mortgage, then house prices should immediately go to infinity. I'm assuming this won't be 'allowed to happen' on the basis that it would immediately break the financial system, but I admit that I have totally underestimated the stupidity of the central banks for the last 10 years, so what the hell do I know?

[Giraffe]

House prices would not rise to infinity because you would still have the capital repayment to handle. Unless everyone could get an interest only mortgage of course.

What is happening is that every time houses seem to reach maximum affordability the Bank of England and the Government tweaks the leavers to squeeze a little more into the Ponzi. It is clear to me they know it’s a Ponzi but they are in so deep they have no other options. I agree if we arrive at negative mortgage rates then it will be clear to everyone what their mission is.

After the financial crisis they put all their eggs in one basket and went for pumping the housing market to try and recover the economy. What they are of course are just a bunch of lazy politicians and bankers, monetary changes are dead easy, a child could do it. Re-balancing the economy on the other hand is an extremely difficult and challenging task; they will ALWAYS do the former. I'm sure that it is dawning that they have failed; next recession will be the unveiling time for the public.

[frederico]

Hmm, negative rates but MMR stress testing etc.

Germany is enjoying negative rates because it has a solid economy. The UK is borrowing on the back of trust and QE.

So house prices will be limited by incomes. As will rents, deflation and negative rates will lead to lower incomes.

[RentaBear]

Hmm, negative rates but MMR stress testing etc.

Germany is enjoying negative rates because it has a solid economy. The UK is borrowing on the back of trust and QE.

So house prices will be limited by incomes. As will rents, deflation and negative rates will lead to lower incomes.

IIRC MMR stress tests only apply to < 5 year fixed - if a bank is stupid enough to offer you -ve rates to borrow, a long fixed rate is what you'd want!

And as for incomes being the ultimate limit on borrowing - there's already a tried and tested fix for that - LIAR LOANs. We had one such scheme pop up this year via a European bank with a UK web-site, I'd imagine we'll see a BoE approved 'it's really nothing like self-certification, this time it's different' liar-loan scheme along soon.

[billybong]

The 'non-financial' problem I see with negative rates is that it exposes the fraud to the man in the street in a way that hasn't happened before.

As soon as the bank starts (in nominal terms) charging you to hold money, or starts paying you to take a loan, then there can be no hiding from the fact that a theft is going on.

It cuts across the generations too, the young will be paying the bank to 'look after' their hard earned wages, and the bank will pay their landlord to take a loan on the house they can't afford. The boomers are trying to buy an annuity or keep their savings in a safe place, these are things they see as their birth right, they're not going to like the banks taking a sizeable cut. So whatever the financial implications of negative rates, if they ever feed through to the consumer via mortgages or bank account interest, I think there'll be a significant political backlash. The perception will be of theft, pure and simple, and people will demand that the government 'do something'. I'm pretty sure the government and the banks are aware of this to a certain extent, and post Brexit, Corbyn, and various other consequences of sacrificing politics on the alter of economic dogma, are finally starting to worry about it.

Logically, if they start paying you to take on a mortgage, then house prices should immediately go to infinity. I'm assuming this won't be 'allowed to happen' on the basis that it would immediately break the financial system, but I admit that I have totally underestimated the stupidity of the central banks for the last 10 years, so what the hell do I know?

There already is significant political backlash with the established parties fragmenting, strong new and well supported parties emerging, the unions (England, Scotland, Wales and Ireland etc) under stress and the Brexit vote.

It isn't all to do with the eu - a lot of it is to do with the increasing realisation of how the country and the economy is being run in general.

Negative interest rates with the theft and fraud that will be even more blatantly on display will indeed add to the momentum of the backlash.

Edited August 8, 2016 by billybong

[Bear Goggles]

There already is significant political backlash with the established parties fragmenting, strong new and well supported parties emerging, the unions (England, Scotland, Wales and Ireland etc) under stress and the Brexit vote.

It isn't all to do with the eu - a lot of it is to do with the increasing realisation of how the country and the economy is being run in general.

Negative interest rates with the theft and fraud that will be even more blatantly on display will indeed add to the momentum of the backlash.

Agree, this is not about the EU at all, but the Brexit vote has shown the establishment that there is a limit to what people will take before they start rejecting the status quo.

I just don't see how any politician can stand up and justify negative interest rates on savings accounts or mortgages to someone who doesn't understand the financial markets and central bank policy. (Or to someone who does for that matter). Saying "It's all a bit complicated, don't worry we know what we're doing" stopped working a while ago, and they know it.

My wider prediction is that I don't think economics is what is going to cause the crash, it'll be politics. They can keep rigging the market way longer than the traders, gold bugs, and anarcho-capitalist libertarians believe is possible. The thing that will bring the house down is political disruption. At some point we reach the threshold at which doing more of the same poses a greater risk to those in power than making a change. Brexit has forced the political class to acknowledge that the threshold is getting closer, it may just take one more event, negative interest rates on mortgages or current accounts may not be that event, but it's certainly a candidate.

[Silverfinger]

Friday's (August 5, 2016) values (data source: see OP):

4 to 5 years: -0.18%
6 to 7 years: -0.05%.

Going down.

EDIT: I just want to point out, in early repayment fee calculations, banks, but also the highest Federal court ("Bundesgerichtshof"), typically assume a risk premium of 0.06% annually. This means that the 4-5 year rate would effectively justify -0.12% mortgages to customers as of this Friday.

Edited August 8, 2016 by Silverfinger