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Danish bank launches world’s first negative interest rate mortgage

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Danish bank launches world’s first negative interest rate mortgage

https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage

 

Quote

...In recognition of how puzzling the new mortgage is for customers, the bank’s FAQ is littered with questions and statements such as Hvordan kan det lade sig gøre? (How is that possible?) and Ja, du læste rigtigt (Yes, you read that right).

The mortgage is possible because Denmark, as well as Sweden and Switzerland, has seen rates in money markets drop to levels that turn banking upside-down.

Høegh said Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers.

But the flipside is that savers will see nothing paid in interest on their deposits – and may also suffer as they go negative.

In Switzerland, the bank UBS last week told its wealthy clients that it would introduce a charge of 0.6% a year if they deposited more than €500,000.

In Denmark, interest rates on savings deposited in Jyske – a Danish equivalent to Halifax or Nationwide in the UK – have already fallen to zero. Now banks in Denmark are thinking of following Switzerland and moving to negative rates on deposits.

 

Edited by Saving For a Space Ship

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I imagine this will come to the UK well within the next 5 years tops. Whatever the timescale it will likely be longer for the US, especially given the structure of the real estate market in the latter.

However, if this does come to pass, I expect it will be accompanied by house price drops in the 20-40% range, and very low inflation or even some deflation. 

So, no free lunch any more for homeowners, mortgage holders or savers with insured deposits (or corporates with massive cash piles) alike, which is how things probably should be.

The really big question, with all the above and likely a large recession around the corner, is what happens to wages in general and especially wages in the more pressured and less skilled ends of the labour market. Negative interest rates should benefit the poorest sections of society since they have no savings to pay interest on and no assets to lose value, assuming that they hold onto their jobs and their wages hold steady in real terms.

I expect Brexit to be a factor in all the above but we will see these kinds of developments in many other countries so probably not the primary factor.

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36 minutes ago, scepticus said:

However, if this does come to pass, I expect it will be accompanied by house price drops in the 20-40% range, and very low inflation or even some deflation. 

So, no free lunch any more for homeowners, mortgage holders or savers with insured deposits (or corporates with massive cash piles) alike, which is how things probably should be.

Quote

In Denmark, the ultra-low interest rate environment has in turn caused home prices to increase as borrowers could afford pricier homes. “Prices in the bigger cities Copenhagen and Århus have been boosted,” said Helge J. Pedersen, group chief economist at Nordea. The Danish Financial Supervisory Authority has consequently taken measures to counter this effect and prevent a housing bubble from forming, Pedersen said.

Why different?

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55 minutes ago, scepticus said:

I imagine this will come to the UK well within the next 5 years tops. Whatever the timescale it will likely be longer for the US, especially given the structure of the real estate market in the latter.

However, if this does come to pass, I expect it will be accompanied by house price drops in the 20-40% range, and very low inflation or even some deflation. 

So, no free lunch any more for homeowners, mortgage holders or savers with insured deposits (or corporates with massive cash piles) alike, which is how things probably should be

It may explain why UK 10 year fixes are so cheap and tempting at the moment, but really you'd be mad to take one if zero or negative rates are on the horizon.

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I refer you to this topic PeanutButter:

 

 

I think the prediction is a little on the dire side, but I don't fundamentally disagree with it. I have also heard similar sentiment from those who think carefully about real estate.

Places like Scandinavia and Switzerland who are first to tip their toes in the icy water below 0% are currently recipients of de-stabilising safe haven inflows. This is one reason why they have to set negative rates - to prevent currency appreciation, but not the only one.

We won't get a good look at the real lay of land of the monetary system in this new regime until enough (economically) neighbouring countries are in the same situation. At that point when the hot money has nowhere safe to flee to, is when deflation will loom. We may be 5 years away from that point as per my first response, so until then all will appear chaotic.

Also bear in mind japan has had 0% interest rates for 20 years and it hasn't done much for HPI there.

 

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Just now, Andy T said:

It may explain why UK 10 year fixes are so cheap and tempting at the moment, but really you'd be mad to take one if zero or negative rates are on the horizon.

Agreed. Even if mortgage rates stay between 0 and 2% you'd be mad to fix at 3% or more, especially with fees etc.

Back when the GFC hit in 2008 and after QE was started and everyone was screaming about swingeing rates rises many were suckered into fixed rate deals and soon regretted it. I was posting on here back then predicting IRs would stay low essentially forever and was roundly ridiculed. So I just stuck to my low rate trackers and have been quite happy with my decisions and predictions ever since.

I also put a lot of government bonds (mainly gilts which were considered a basket case investment at the time) into my SIPP about the same time when bond yields were spiking and didn't regret that either (I sold them all many years ago though). May be time to start thinking about buying them back again, but not until the next round of QE comes and the talk about inflation and "spiking IRs" comes back and there is a temporary dip in yields. 

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A mortgage rates tend to zero, house prices would tend towards infinity. 

Think about it.

If I can borrow money for free, I can buy 100 properties and use the rental income (less tax and expenses) to pay off the debt. After 30 years, I have 100 freehold properties. 

The only thing stopping people from doing this would be a dramatic rise in house prices or the knowledge that interest rates would turn positive and increase. 

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Just now, Odakyu-sen said:

A mortgage rates tend to zero, house prices would tend towards infinity. 

Think about it.

If I can borrow money for free, I can buy 100 properties and use the rental income (less tax and expenses) to pay off the debt. After 30 years, I have 100 freehold properties. 

The only thing stopping people from doing this would be a dramatic rise in house prices or the knowledge that interest rates would turn positive and increase. 

Not if house prices (and rents) are falling at the same time as -ve rate mortgages are being offered. You borrow 500K on a house at say 600K at say -0.5% over 5 years and during that time the value of that house falls by 25%.

Is that an investment you feel is a no brainer? It is hard for the average punter to imagine deflationary scenarios since it has not happened in our lifetime so make sure you are not making the wrong assumptions.

Bear in mind that while you may make some short term cash flow gain from renting that property out your loss of equity in the first property would prevent you from having a deposit to put down on a second rental property. Also you'd need cashflow for maintenance etc and its not obvious that those costs would go down much. In these types of scenarios a -0.5% mortgage would only be available at sensible LTV ratios. And in any case, mortgage rates are already very near 0 for sound borrowers.

Also it seems reasonable to me that while rates may dwell below 0 for some time they are unlikely to do so forever, and recoveries even if temporary, would push rates back into positive (but still low) territory. So an investor could certainly not rely on -ve rates forever. 

It seems sensible to me to plan for a baseline scenario in which rates of interest and borrowing stay low for the forseeable and will dip into negative territory for some time and then recover back to low positive territory for a while, all the while against a backdrop of looming deflation and asset price declines. Rinse and repeat. 

Longer term 10 years out , if you are a believer in climate change you should also factor and consider what that is likely to do to returns on capital. My view is that it is unlikely to lead to higher returns!

 

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scepticus,

A paid-off house is still a paid-off house, even if it has halved in value. (Of course, if the cost of maintaining the house exceeded the rental income, then you would have a problem, but isn't maintenance a taxable deduction, as well as capital depreciation?)

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1 hour ago, Odakyu-sen said:

scepticus,

A paid-off house is still a paid-off house, even if it has halved in value. (Of course, if the cost of maintaining the house exceeded the rental income, then you would have a problem, but isn't maintenance a taxable deduction, as well as capital depreciation?)

Only if within a limited company after George Osbourne's changes if you are coming talking about houses other than your primary residence ie BTL ( tapering down at the moment )

Which is why hundreds of thousands of Buy to leech amateurs are f**** - rock and a hard place - they either pay up on a yearly basis - essentially unless they have paid off mortgage it’s unviable or put in a limited company where their capital gain will be crystallised and they will pay capital gains tax 

 

Edited by GregBowman

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13 minutes ago, Odakyu-sen said:

There's no capital gains tax in New Zealand (yet...). Nor any inheritance tax (yet...).

Not even on a property that’s not your residence ? And no IHT ! No wonder people want to go there 😉

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7 hours ago, scepticus said:

Not if house prices (and rents) are falling at the same time as -ve rate mortgages are being offered. You borrow 500K on a house at say 600K at say -0.5% over 5 years and during that time the value of that house falls by 25%.

Is that an investment you feel is a no brainer? It is hard for the average punter to imagine deflationary scenarios since it has not happened in our lifetime so make sure you are not making the wrong assumptions.

Bear in mind that while you may make some short term cash flow gain from renting that property out your loss of equity in the first property would prevent you from having a deposit to put down on a second rental property. Also you'd need cashflow for maintenance etc and its not obvious that those costs would go down much. In these types of scenarios a -0.5% mortgage would only be available at sensible LTV ratios. And in any case, mortgage rates are already very near 0 for sound borrowers.

Also it seems reasonable to me that while rates may dwell below 0 for some time they are unlikely to do so forever, and recoveries even if temporary, would push rates back into positive (but still low) territory. So an investor could certainly not rely on -ve rates forever. 

It seems sensible to me to plan for a baseline scenario in which rates of interest and borrowing stay low for the forseeable and will dip into negative territory for some time and then recover back to low positive territory for a while, all the while against a backdrop of looming deflation and asset price declines. Rinse and repeat. 

Longer term 10 years out , if you are a believer in climate change you should also factor and consider what that is likely to do to returns on capital. My view is that it is unlikely to lead to higher returns!

 

If you're paid to take a mortgage, ie the bank pays you, why would prices fall. As rates have dropped, prices have risen. Why would prices fall? What's this prediction based on? 

Where's this rate payment coming from? Are there more savers than borrowers? This is what this policy implies. If theres not, Im guessing it is QE money from the magic printing press. 

 

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At some point the lunacy of the wealth effect policies will be understood for being nefarious policies. 

That "nobody" loses mentality, keeping zombie companies alive, preventing social mobility will feed too much anger into the public. Reckoning is only delayed

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9 hours ago, scepticus said:

I refer you to this topic PeanutButter:

 

 

I think the prediction is a little on the dire side, but I don't fundamentally disagree with it. I have also heard similar sentiment from those who think carefully about real estate.

Places like Scandinavia and Switzerland who are first to tip their toes in the icy water below 0% are currently recipients of de-stabilising safe haven inflows. This is one reason why they have to set negative rates - to prevent currency appreciation, but not the only one.

We won't get a good look at the real lay of land of the monetary system in this new regime until enough (economically) neighbouring countries are in the same situation. At that point when the hot money has nowhere safe to flee to, is when deflation will loom. We may be 5 years away from that point as per my first response, so until then all will appear chaotic.

Also bear in mind japan has had 0% interest rates for 20 years and it hasn't done much for HPI there.

Japan has a completely different housing market and is in no way comparable.

Their population is decreasing.

They view houses as depreciating assets and regularly bulldoze them and build new (primarily pre-fab) ones.

They can’t even give old houses away because of burdensome property taxes.

The nation is still collectively recoiling from the insane property boom/crash that burned a lot of people. They have long memories and culturally take ‘lessons’ to heart.

I’m not saying it won’t happen here, I’m saying Japan is no guide. 

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18 minutes ago, PeanutButter said:

Japan has a completely different housing market and is in no way comparable.

Their population is decreasing.

They view houses as depreciating assets and regularly bulldoze them and build new (primarily pre-fab) ones.

They can’t even give old houses away because of burdensome property taxes.

The nation is still collectively recoiling from the insane property boom/crash that burned a lot of people. They have long memories and culturally take ‘lessons’ to heart.

I’m not saying it won’t happen here, I’m saying Japan is no guide. 

So is Europes.

The UKs population may look like its increasing,. whoever, its only benefit dependent migrants that are keeping the UK pop figures up.

Given the choice of half of Somalia and Poland living on bennies or an Economy like Japans, Id pick Japan every  time.

 

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52 minutes ago, spyguy said:

So is Europes.

The UKs population may look like its increasing,. whoever, its only benefit dependent migrants that are keeping the UK pop figures up.

Given the choice of half of Somalia and Poland living on bennies or an Economy like Japans, Id pick Japan every  time.

 

Absolute no brainer in the context of automation too. 

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57 minutes ago, spyguy said:

So is Europes.

The UKs population may look like its increasing,. whoever, its only benefit dependent migrants that are keeping the UK pop figures up.

Given the choice of half of Somalia and Poland living on bennies or an Economy like Japans, Id pick Japan every  time.

 

Obviously. I didn’t say anything negative about Japan’s economy and have enjoyed spending time there on many trips.

The very fact that with all these headwinds they have managed to maintain an outstanding standard of living and one of the world’s top 5 economies shows their resilience, cohesion and brilliance as a nation. I wish I could say the same for the UK.

However, it is a fundamentally different proposition from UK, particularly in housing, and any comparison simply doesn’t work for myriad reasons. 

 

Edited by PeanutButter

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7 hours ago, Odakyu-sen said:

scepticus,

A paid-off house is still a paid-off house, even if it has halved in value. (Of course, if the cost of maintaining the house exceeded the rental income, then you would have a problem, but isn't maintenance a taxable deduction, as well as capital depreciation?)

 

You assume rental payments will cover the mortgage. In general rental yields match financial market rates plus some premium for illiquidity, so with market risk free rates below 0, rents must fall in relation to house prices versus a situation of market risk free rates at say 1%. An in this scenario, house prices are falling continuously so one would expect rents to follow house prices down.

Another way of stating the same thing is to ask if that your scheme is such a no brainer - why would anyone rent? Note that although less renters means more house buyers, the new owner occupiers are simply replacing landlords on a one for one basis, so this does not produce upwards pressure on prices.

It is not reasonable to expect that in a modern market, there will be a free lunch where you can risklessly exceed the average market rate of return.

Assuming there is a general deflationary scenario here, then what that means is that the stock of credit supplied to the economy is falling, and hopefully you can see that this must produce downwards pressure on all prices - assets and rents.

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6 minutes ago, PeanutButter said:

Obviously. I didn’t say anything negative about Japan’s economy and have enjoyed spending time there on many trips.

The very fact that with all these headwinds they have managed to maintain an outstanding standard of living and one of the world’s top 5 economies shows their resilience, cohesion and brilliance as a nation. I wish I could say the same for the UK.

However, it is a fundamentally different proposition from UK, particularly in housing, and any comparison simply doesn’t work for myriad reasons. 

 

Or it shows that economic and population growth and immigration for immigration sake is not all its cracked up to be.

Japan has very productive economy.

Its got a fair few problems but none that anywhere close to what UK n Europe face.

Looking back at the last ~20 years, the Japanense central bank should have been printing Yen to buy foreign assets.

 

 

 

 

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2 hours ago, PeanutButter said:

I’m not saying it won’t happen here, I’m saying Japan is no guide. 

It will happen here, and everywhere, eventually. No country can go on increasing population forever, whether via copulation or immigration. The only question is when, for any given country.

Also the quantity of people isn't the only factor, the ratio of working age population to non working older population is also key for economic metrics like rates of return and land values.

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3 minutes ago, scepticus said:

It will happen here, and everywhere, eventually. No country can go on increasing population forever, whether via copulation or immigration. The only question is when, for any given country.

Also the quantity of people isn't the only factor, the ratio of working age population to non working older population is also key for economic metrics like rates of return and land values.

Sure well I'm not holding my breath :D 

Tick tock

 

 

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4 hours ago, GreenDevil said:

If you're paid to take a mortgage, ie the bank pays you, why would prices fall. As rates have dropped, prices have risen. Why would prices fall? What's this prediction based on? 

Where's this rate payment coming from? Are there more savers than borrowers? This is what this policy implies. If theres not, Im guessing it is QE money from the magic printing press. 

 

This forum is predicated on the view that prices will fall sooner or later for the simple reason that prices are unsustainably high. There doesn't need to be much more reason than that. However there are many other specific reasons why prices might fall such as another big recession, and in the longer term issues such as demographics and climate problems. Don't forget that prices were falling during the GFC even as rates were being cut to 0, and prior to the GFC, prices were rising even as rates were being increased up until 2007.

It sounds like you think prices will stay as they are or go up, in which case that would need justifying, especially on this forum.

To your second question, for -ve nominal rates to prevail yes savers must outnumber borrowers on a pound for pound basis. And in the longer run for a -ve rate to be offered to certain mortgage borrowers then yes that would have to be funded by depositors of some form. However, just because some high quality borrowers with safe mortgages get offered a small -ve rate doesn't mean that all or even many will. In which case, only the largest depositors (e.g. big corporates and HNWIs) might have to face -ve deposit rates in order to fund a limited number of such mortgages.

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4 hours ago, GreenDevil said:

If you're paid to take a mortgage, ie the bank pays you, why would prices fall. As rates have dropped, prices have risen. Why would prices fall? What's this prediction based on? 

Where's this rate payment coming from? Are there more savers than borrowers? This is what this policy implies. If theres not, Im guessing it is QE money from the magic printing press. 

 

+1

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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