7 ms·

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. Me

by apo 7y ago

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 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 looks like a normal economy with low inflation and red-hot housing market. Somebody is very wrong about one or more of the following: - the future direction of the housing market - the future direction of interest rates - the future direction of inflation Edit: Google translate sheds some light. It appears that the Danish equivalent of "points' clouds the picture: > Total repayments before tax DKK 277,392 (on a DKK 250,000 loan) - of which total interest and contributions DKK 8,264 changes in the exchange rate will affect the size of the amount paid out. https://translate.google.com/translate?hl=en&sl=auto&tl=en&u=https%3A%2F%2Fwww.jyskebank.dk%2Fbolig%2Fnyheder%2Frealkredit-med-negativ-rente https://translate.google.com/translate?hl=en&sl=auto&tl=en&u... Low, but not negative.

kebman 7y ago
As far as I know, fees and charges on the loan make it about 2% anyway. Still a pretty cheap loan, I'd say.
- apo 7y ago
  Good point - updated answer with a link. Hopefully there's a better one out there.
collyw 7y ago
>That means the bank is absorbing a real loss of 1.5%/year on the deal. (As I understand it) the Eurobor rate is negative (the rate that the central bank lends to the other banks), so its unlikely that the bank are taking the hit directly.
- zajio1am 7y ago
  Euribor is not a rate that central bank lends to other banks, it is a rate commercial banks lend between themselves. ECB has its own rates (e.g. deposit facility, marginal lending facility for overnight deposits and loans).
- martin_bech 7y ago
  As I mentioned somewhere else, these loans, are based 100% on bonds, sold on the open market, so the issuer is not loosing money. The issuer “realkredit selskab” just gets a fee. Who buys the bonds, could be anyone.. banks, pensionfunds, people who need to store money, in an “insured” way.
martin_bech 7y ago
All Danish “realkredit” morgages are done with bonds, so the “bank” is not loosing money, the buyer of the bond is. For some loans, on some conditions, the morgage is actually negative, and lender is either paid a quartely price, or the debt is lowered accordingly. (This is for the morgage named F5, with a fixed 5year rate, and when the house has very low debt, then the fee charged, is also lower, as it is based on risk)
olau 7y ago
Some background: In Denmark, mortgages for housing are handled by special real-estate lenders (realkreditinstitutter) who issue bonds and handles defaults. These bonds are considered to be very stable, about the same quality as state bonds, as the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction) so can usually recover most of the money through a forced sale. Also there's a fee on top of the bond rate to absorb the losses as far as I understand. The fee depends on the security percentage, so if the lender only has a security in the top 60-80% part of the value of the house, the fee is much higher, see the tables here: https://www.mybanker.dk/sammenlign/bolig/bidragssatser/ https://www.mybanker.dk/sammenlign/bolig/bidragssatser/ The Danish central bank has had negative interest rates for some time, and these real-estate bond rates have also been falling. When taking out a mortgage, you can either opt for a fixed rate for up to 30 years, or variable-rate bonds where the interest is redetermined periodically, e.g. once a year. The variable-rate bonds have been negative for some years now. The news here is that the rates have been falling even more lately, and that you can now get the negative rate fixed for up to ten years. In any case, it's the bond investors who are losing money, not the real-estate lenders who apply a fee on top, both as a rate and a fixed fee when applying for the loan. The rates are so low that I think that if you're in the low-risk category, you might end up with a small negative total rate. Of course, the fixed fees when obtaining the loan may eat that.
- olau 7y ago
  And yes, the negative interest rate at the Danish central bank does translate to negative interest rates for deposits. Not yet for consumers, but corporate accounts have negative rates.
  - jackcosgrove 7y ago
    Negative central bank rates are an attempt to spur consumption via all of the stimulus created since the financial crisis. Banks have been loath to pass on these negative rates to depositors because no one wants to be the first bank to do so, as depositors would flee that bank for another bank that was still eating the negative interest rate. However, the banks legally cannot coordinate actions as that would be evidence of cartel behavior. So they have just eaten the losses thus far. This appears to be a first step to pass negative rates onto consumers, in this case onto borrowers where the first mover has an advantage.
rolltiide 7y ago
Why is it strange to you that the housing market is also roaring? 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.
tom_mellior 7y ago
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.
- Whil- 7y ago
  Housing prices normally aren't a part of the inflation calculation.
  - tom_mellior 7y ago
    "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 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." and links to https://en.wikipedia.org/wiki/Consumer_price_index https://en.wikipedia.org/wiki/Consumer_price_index which says "The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is in turn a weighted average of sub-sub-indices." and goes on to give an example (apparently ficional) in which housing makes up 41.4% of the index. Edit: My copy of Samuelson and Nordhaus, Economics, 19th edition, has an example of a consumer price index including housing weighted at 42.4%. At that weighting, unless my math is off, the remaining 57.6% of the stuff in the index would need to get cheaper by 1.2% to get to overall 1% inflation with a 4% increase in housing prices: 42.4 * 1.04 + 57.6 * (1 - 0.012) = 101.00479999999999 Some things do get cheaper over time (like consumer electronics, sometimes), but others not so much.
    - MagnumOpus 7y ago
      - Normally as in almost everywhere in the world (apart from a few places like Sweden I think?) - Buying a house is not a living expense, it is a capital investment. This is the reason why statisticians either only include rents (e.g. the EU Eurostat) or replicate the housing costs of owner-occupiers with an “owners equivalent rent” (the US BLS does this). - Housing might be 30% or more of CPI in the US but none of it is house prices for the reason above. Most of it is rents and owners equivalent rent, some of it is furnishing costs, some of it is utility tariffs, some of it is costs of repairs and maintenance.
gridlockd 7y ago
> low inflation and red-hot housing market. The more reasonable way to look at it is that it is high inflation and a weak housing market. If the housing market was so hot, why would interest have to drop below zero? Rather, houses are extremely expensive because money for houses (i.e. mortgages) is extremely cheap.

by apo 7y ago

kebman 7y ago

As far as I know, fees and charges on the loan make it about 2% anyway. Still a pretty cheap loan, I'd say.

apo 7y ago
Good point - updated answer with a link. Hopefully there's a better one out there.

collyw 7y ago

>That means the bank is absorbing a real loss of 1.5%/year on the deal. (As I understand it) the Eurobor rate is negative (the rate that the central bank lends to the other banks), so its unlikely that the bank are taking the hit directly.

zajio1am 7y ago
Euribor is not a rate that central bank lends to other banks, it is a rate commercial banks lend between themselves. ECB has its own rates (e.g. deposit facility, marginal lending facility for overnight deposits and loans).
martin_bech 7y ago
As I mentioned somewhere else, these loans, are based 100% on bonds, sold on the open market, so the issuer is not loosing money. The issuer “realkredit selskab” just gets a fee. Who buys the bonds, could be anyone.. banks, pensionfunds, people who need to store money, in an “insured” way.

martin_bech 7y ago

All Danish “realkredit” morgages are done with bonds, so the “bank” is not loosing money, the buyer of the bond is. For some loans, on some conditions, the morgage is actually negative, and lender is either paid a quartely price, or the debt is lowered accordingly. (This is for the morgage named F5, with a fixed 5year rate, and when the house has very low debt, then the fee charged, is also lower, as it is based on risk)

olau 7y ago

Some background: In Denmark, mortgages for housing are handled by special real-estate lenders (realkreditinstitutter) who issue bonds and handles defaults. These bonds are considered to be very stable, about the same quality as state bonds, as the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction) so can usually recover most of the money through a forced sale. Also there's a fee on top of the bond rate to absorb the losses as far as I understand. The fee depends on the security percentage, so if the lender only has a security in the top 60-80% part of the value of the house, the fee is much higher, see the tables here: https://www.mybanker.dk/sammenlign/bolig/bidragssatser/ https://www.mybanker.dk/sammenlign/bolig/bidragssatser/ The Danish central bank has had negative interest rates for some time, and these real-estate bond rates have also been falling. When taking out a mortgage, you can either opt for a fixed rate for up to 30 years, or variable-rate bonds where the interest is redetermined periodically, e.g. once a year. The variable-rate bonds have been negative for some years now. The news here is that the rates have been falling even more lately, and that you can now get the negative rate fixed for up to ten years. In any case, it's the bond investors who are losing money, not the real-estate lenders who apply a fee on top, both as a rate and a fixed fee when applying for the loan. The rates are so low that I think that if you're in the low-risk category, you might end up with a small negative total rate. Of course, the fixed fees when obtaining the loan may eat that.

olau 7y ago
And yes, the negative interest rate at the Danish central bank does translate to negative interest rates for deposits. Not yet for consumers, but corporate accounts have negative rates.
- jackcosgrove 7y ago
  Negative central bank rates are an attempt to spur consumption via all of the stimulus created since the financial crisis. Banks have been loath to pass on these negative rates to depositors because no one wants to be the first bank to do so, as depositors would flee that bank for another bank that was still eating the negative interest rate. However, the banks legally cannot coordinate actions as that would be evidence of cartel behavior. So they have just eaten the losses thus far. This appears to be a first step to pass negative rates onto consumers, in this case onto borrowers where the first mover has an advantage.

rolltiide 7y ago

Why is it strange to you that the housing market is also roaring? 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.

tom_mellior 7y ago

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.

Whil- 7y ago
Housing prices normally aren't a part of the inflation calculation.
- tom_mellior 7y ago
  "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 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." and links to https://en.wikipedia.org/wiki/Consumer_price_index https://en.wikipedia.org/wiki/Consumer_price_index which says "The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is in turn a weighted average of sub-sub-indices." and goes on to give an example (apparently ficional) in which housing makes up 41.4% of the index. Edit: My copy of Samuelson and Nordhaus, Economics, 19th edition, has an example of a consumer price index including housing weighted at 42.4%. At that weighting, unless my math is off, the remaining 57.6% of the stuff in the index would need to get cheaper by 1.2% to get to overall 1% inflation with a 4% increase in housing prices: 42.4 * 1.04 + 57.6 * (1 - 0.012) = 101.00479999999999 Some things do get cheaper over time (like consumer electronics, sometimes), but others not so much.
  - MagnumOpus 7y ago
    - Normally as in almost everywhere in the world (apart from a few places like Sweden I think?) - Buying a house is not a living expense, it is a capital investment. This is the reason why statisticians either only include rents (e.g. the EU Eurostat) or replicate the housing costs of owner-occupiers with an “owners equivalent rent” (the US BLS does this). - Housing might be 30% or more of CPI in the US but none of it is house prices for the reason above. Most of it is rents and owners equivalent rent, some of it is furnishing costs, some of it is utility tariffs, some of it is costs of repairs and maintenance.

gridlockd 7y ago

> low inflation and red-hot housing market. The more reasonable way to look at it is that it is high inflation and a weak housing market. If the housing market was so hot, why would interest have to drop below zero? Rather, houses are extremely expensive because money for houses (i.e. mortgages) is extremely cheap.