6 ms·

Denmark offers homeowners 20-year loans at a fixed interest rate of zero

45 points by SpaceNinja 6y ago

jcbrand 6y ago
House prices are driven upwards due to low interest rates, so this move will most likely only exacerbate the already high house prices. I'm not sure about Denmark, but in Germany house prices have about doubled in the last 10 years, (with the ECB insisting there's no inflation). Given the choice between high interest rates and cheaper house prices, versus low interest rates and expensive houses, I'd rather take the former, since rates can always come down again, allowing you to refinance and pay less for your house overall. When (in the current environment) rates start going up again (they're basically at the lower bound now), house prices will fall, however home "owners" (with mortgages) won't pay less for their houses because their mortgages are fixed (and if they weren't fixed, they'd be doubly screwed by the high rates).
- throw893232 6y ago
  Little trick for a piece of mind: Recalculate prices and salary into gold. You will discover that things are more or less the same and stable. Shoemaker in 15th century made similar money as today.
  - OscarCunningham 6y ago
    Given that the gold price has increased by a factor of 8 in the last 20 years it's hard to see how that could be true. Even if it happens that there's an equivalence between today and 1450, a shoemaker in 2000 would be earning 8 times more. EDIT: To put it another way, over the last 20 years the Dollar, Euro and Pound have all approximately averaged out to their target 2% inflation rate. Prices in gold terms have averaged to 9% deflation per year. Since 9 > 2, gold is less stable than modern fiat currencies.
  - bdjfkrk 6y ago
    Not sure shoemaker is a good example. Wouldn't that today be Nike, Adidas, huge corporations and not individuals? An individual shoemaker today is probably in the luxury business.
- BlargMcLarg 6y ago
  Same thing in the Netherlands. Prices doubling. The monthly costs are similar to years ago, but the high barrier to entry makes it impossible for young people to get anything similar to previous generations for the same money. As a result, rent goes up and young people now pay much more rent than before, semi-forced. Low rates do not help when the market is this overheated. Worse, disincentivising people from prematurely paying their mortgage sounds like a great idea for recreating a certain crisis not too long ago.
  - the-dude 6y ago
    Case in point : I owned a 300k house with my ex, we had a variable Euribor mortage taken out in 2004. With the Euribor at zero or below, the actual rate was close to 0.5%. Roughly translated to about €200 a month. Now I am renting, a third of the space, for about three times the money ( maybe even more ).
  - firebacon 6y ago
    The average price of existing houses in the Netherlands increased by 55% since 2013. Source: https://www.cbs.nl/en-gb/news/2020/52/house-prices-almost-9-percent-higher-in-november https://www.cbs.nl/en-gb/news/2020/52/house-prices-almost-9-...
    - BlargMcLarg 6y ago
      I wouldn't call 55% in 7 years "only". Especially given this statistic doesn't highlight type of housing and price groups (read: housing in the far outskirts pulling averages down, though COVID is changing this dynamic). Starter wages have barely risen since then, let alone kept up. And along with the crisis, one now gets far less mortgage for the same inflation-adjusted salary than in 2013, despite the lower rates.
  - jacobion 6y ago
    I think there might be two things going on here: one is a rise in various forms of social inequality, between generations, between people living in tier one cities and smaller cities or towns, between workers in certain industries and the rest. I tend to think this is bad, but I don't think it's related to interest rates. The other is the culmination of a fifty-year process set in motion when Western economies went from gold-backed currency to fiat currency, and then from political control of currency to independent Central Banks. During this period both inflation and interest rate have moved monotonically downwards, essentially both to zero. What if you assume that this state of affairs is strange because new, but perfectly benign, and will last indefinitely? It's absolutely true that those people who bought housing and other assets when rates were 10% have profited from a huge windfall. However, it's a one-off windfall. They simply got a discount, because 20/30/40 years ago, borrowing long term to pay cash was hugely burdensome. Today's homebuyers will buy assets at prices which reflect low interest rates, and they will pay low interest rates on their loans. As young workers, they might actually be better off in the long run. In a long term regime of zero rates, more of society's wealth is going to producers (and risk-takers), less is going to people who just hoard cash. You might think it's nice for society to do something to correct this one-off inequality. Maybe so, but it's not fundamentally different to the other inequalities which exist. In particular, it's unclear why either artificially raising rates or artificially raising inflation are the solution. Neither of these are particularly effective in helping people who have got the short end of the stick. Both benefit some groups of rich people and some groups of poor people, and harm some other groups. There are much better solutions which can be pursued by governments directly without political interference in currencies. Of course the type of person (job, family status, education level) who could buy a house in Berlin or London in the 1990's could not buy that same house today. You can either say 'too bad, you were out competed', or you can try to do something about it: pay teachers and social workers more, build more houses, make smaller cities more desirable to live in, provide better training and career opportunities etc. Blaming this on the dubious idea that cash in the bank should accrue 8% interest per year lets governments off the hook for actually solving the problems, and just advocates a different set of inequalities and broken incentives.
- throwaway-8c93 6y ago
  > with the ECB insisting there's no inflation House prices are represented in the consumer price index as 'imputed rent', generally by far the highest weight item. Last time I checked, its weight was at 9%.
- frafra 6y ago
  You are right about the house prices in Germany, but your statement about ECB is not entirely correct. ECB does not "insist there is no inflation" in Germany or in Europe: in both cases it has been around 2 % for the last 20 years: https://portal.dataviz.ecb.europa.eu/views/HICP_dashboard_ETS_16049391112180/InflationDashboard https://portal.dataviz.ecb.europa.eu/views/HICP_dashboard_ET... There is a reason why the ECB estimation of inflation (HICP) seems lower than expected in your experience: it does not take into account owner-occupied housing (OOH) prices, which include O.1.1.1.1 (Purchases of new dwellings index). Mario Draghi (former resident of the ECB) was in favour of that, but the European Commission thinks that OOH is not suitable to be included in HICP yet. References: - https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2018-768-F1-EN-MAIN-PART-1.PDF https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2... - https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter180615_Loones.en.pdf?c70e96e017400693be88594080334077 https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter180615_...
  - bjeds 6y ago
    I may be tired or dumb, but your argument sounds circular to me. Of course the ECB won't insist there is no inflation if they themselves have defined housing to not be included in the definition they use to measure inflation. This doesn't mean that the parent commentator is wrong nor does it imply that ECB is correct in their definition. For most people, housing is a significant cost in day to day life, and will of course be felt as inflation, regardless of how it's defined and measured in monetary policy. If it were up to me, housing should also be included in the definition of inflation. That would be a good way to lay bare the downsides with an aggressively expanding monetary policy.
    - frafra 6y ago
      It is not a circular argument to show that a statement is not correct: ECB never said there is no inflation in the first place. ~2% is not "no inflation"; 2% is the target that the ECB aims at. In addition to that, I added an explanation why such a number seems lower that you could expect. Please note that ECB does not define the HICP, the European Commission does it: https://ec.europa.eu/eurostat/web/hicp/faq https://ec.europa.eu/eurostat/web/hicp/faq
- pizza234 6y ago
  I'm very skeptical at the following claim, if taken at face value: > Germany house prices have about doubled in the last 10 years In the capital, prices 10 years ago were extremely low. People who bought apartments between 10 and 20 ago bought them as low as 1000€/sqm, which is exceptionally low for a European capital. Under such conditions, price doubling is expected independently of any policy.
  - martin_bech 6y ago
    German housing is a litle different, as many prefer to rent, so less demand for beeing an owner.
    - p1esk 6y ago
      Why do they prefer to rent?
      - allendoerfer 6y ago
        After WWII the German government created strict renter protection laws and the state invested heavily in relatively high quality public housing. You can compare the results to the UK, which cities were also bombed, but invested in private housing instead. Germany also famously had been "the sick man of Europe" before the current boom, were real wages did not rise for a long time.
    - raxxorrax 6y ago
      True, if I have no chance to finance it, you prefer renting compared to homelessness. But workplace mobility, yeah!
  - Cthulhu_ 6y ago
    10 years ago was the peak of the housing bubble collapse (or just after), so the price of houses was depressed for a while. That said, housing prices have gone up by ridiculous amounts since then, in part thanks to economic recovery, in part due to low mortgage interest rates, and in part (linked) due to low savings account rates. Better to put that money in real estate (and more risky investments on the stock market) than let it wither in a savings account. But hey, for a while a few people made a lot of money.
- martin_bech 6y ago
  You are right, houseprices in denmark are going crazy.. But makes sense since 0% fixed mortgages.. you can get a 30year fixed at 0.5% with the option of only paying the interest, for the first 10years
- PartiallyTyped 6y ago
  I am paying a 950 euro rent for a <24 sq meters in Copenhagen, not downtown Copenhagen, inc water/electricity/heat/washer/drier. The situation is absurd. Back home (still in Europe) I paid half for 35-40 sq meters. Yes, the salaries offset some of it, but still..
  - Cthulhu_ 6y ago
    The salaries you're eligible for offset some of it, but there are a lot of people that have to get by on minimum wage in the big cities as well. Instead of making mortgages more attractive, I think governments should increase minimum wage. If they do a correction to match up with inflation (and cost of living, since the two don't seem to align), suddenly minimum wage will jump to €30/hour.
  - jacobion 6y ago
    Why do low interest rates cause high rents? High house prices sure, but why does it affect rents? You prefer to live in Copenhagen than the part of Europe you come from, for the higher salaries among other reasons. Probably lots of other people share your preference. Doesn't this suffice to explain why rents are much higher in Copenhagen than in your home region?
tormeh 6y ago
So, the stock market gives amazing returns, but debt is free? We must have absolutely massive asset price inflation, even if we have no consumer price inflation. I wonder if central banks are looking at the right metrics.
jariel 6y ago
Can you say 'housing inflation'? All this does is introduce more monetary demand for housing, increases prices, and stretches out credit putting further distance between those with no homes, and those with the biggest. Housing may be one of the largest drivers in personal wealth in our era - the more you can afford for a down payment and payments, the greater your financial leverage over those with less leverage. And of course, renters are left in the lurch with higher prices. A smarter plan might be to limit the term lengths of mortgages to 15 years, and to frankly increase (and stabilize) interest rates on homes. If interventions are what you want to do ... FYI money will come out of regular consumption and get plowed into real-estate, which is mostly a non productive asset.
- Codes 6y ago
  The inflation is only a problem in the biggest cities (eg. cph, Odense, Aarhus) In some parts of denmark the prices actually goes down (Southern jutland) I live 80 km's from Aarhus and my house has only gained 7% in value over the last 6 years.
  - lotsofpulp 6y ago
    It’s the same in the US. Prices in vast areas are stagnant, but some areas skyrocketed. It’s just an exacerbation of the growing wealth/income divide.
- IkmoIkmo 6y ago
  In virtually all countries, the size of the mortgage allowed is based on capacity to carry debt, by law or by market practice, and expressed as the percentage of monthly income that may be used on a mortgage, which is capped. That means increasing interest rates and halving the payback time will massively increase monthly cost to carry debt / monthly mortgage payments. Given the cap, that means people can borrow much less. Their ability to buy or afford a home does not improve. Why would that be preferable? What you'll also achieve is that those with cash now will have a big advantage over those without cash, but with a stable income, who're willing to work for 30 years, because mortgage-based buying becomes less interesting. Lastly, you'll make sure that much less capital flows to real estate, which means it's less interesting to build more of it, reducing the long-term supply, and exacerbating the housing shortages you see in many countries. And you're doing all this, artificially. Set interest rates above market rates. Set loan terms to max 15 years, while a 25 year old will need to live somewhere after 40, too, and is fully capable to take on a loan at 41, or 51, or beyond. There's simply no easy solutions to this issue. This idea that messing with interest rates will magically solve things is myopic. What I will agree with is this: make owning or renting fiscally neutral. In many countries, home owners get subsidies, tax breaks, interest rate deductions, while renters don't. That must be stopped. Second, we need to consider government policy to deter hyper-concentration, i.e., in many countries, the 5% top-1 tier cities get 25% of the investments/attention/projects/jobs/universities/infrastructure. That leads to massive demand in a few spots, and a brain/capital drain from the rest of the country. Because land is finite, it makes no sense to concentrate all economic activity in one or a few cities. Cities are efficient and necessary, but tier-2 and tier-3 cities need more attention to spread people around more. There's actually plenty of housing, but some of it costs $500 per square foot, and some $50. That must be balanced more. Third, national government should exert its power more over local governments to be more accommodating, e.g. when it comes to zoning, building laws, density etc. Local government is often captured by existing home owners, which must be heard, but whose voice is currently overpowering generations of future citizens who outnumber them and aren't being accommodated. You have an industry captured by NIMBYism, and local government has no governance model to give future citizens a voice. In a municipality with 60% single family owner-occupied homes who wish to keep construction low, vs 30% long-term renters and 20% transient renters, and 500% future renters, who wish construction to increase, the current democratic governance model keeps favouring the 60% SFH owner-occupiers. But it's not necessarily a net benefit to society, or the most democratic outcome.
bfwi 6y ago
This is not truly a 0% loan. Because of the fees, you will pay a minimum of 0,74%. Also because these mortgage instruments are traded at a price less than 100, you have to take out a loan larger than the amount of money that will be payed out. For example, to loan $100 you might have to take out a loan where you start out owing $105, which further increases the actual interest.
brtkdotse 6y ago
This is nuts. Housing inflation is rampant, I live in Sweden and my house value increased 40% in 5 years. We currently pay less per month for our 250 m2 house than my parents pay for their 75 m2 rental apartment.
- ChuckNorris89 6y ago
  Jesus, can yong folk afford to buy anything at this point?
  - Gwypaas 6y ago
    Downward pressure and stability margins have been added recently by forcing people to amortize their loans, seemed to cool the market for a year or so until continuing to increase. Loans above 70% of value needs to be amortized by 2% per year. Loans above 50% of value needs to be amortized by 1% per year. If your house loan is more than 4.5 times your yearly income, regardless of the percentage, then you need to amortize another 1% per year until below it. This has of course made it even harder for young people to enter the market, but it seems to make for an overall more healthy long-term market in the current debt climate. For many the hardest part is the by law required 15% down payment, this can be financed by private loans but that comes with it's own catches. Many instead end up relying on parents who has ridden the wave taking out a loan on their home, if you are fortunate enough to have home owning parents.
    - brtkdotse 6y ago
      Agree, and to add some context, a lot of people have parents who’s mortgage was all but eaten up by 15% inflation in the 80s.
  - throwaway-8c93 6y ago
    I don't want to be the spoilsport, but yes, they very much can and it's not even that difficult. Case in point: I moved to Finland as an immigrant 9 years ago, with nothing but a backpack, girlfriend and $12k in my bank account. Within 7 years, we paid down the mortgage for 100 m2 house in the capital area, while raising two children, with one above average and one below average income. And I don't feel like we were materially deprived in any way. I think the main culprit is couples settling down way too late in their lives. Instead of settling down at the age of ~25 and combining two incomes to pay off the mortgage principle, we have two adults, each paying ~$700/month rents. When they finally move together at the age of ~30, that's almost $100k that went down the drain. The baby-boomer generation used to move together at even earlier ages, 19-22.
arnon 6y ago
Earlier discussion from yesterday: https://news.ycombinator.com/item?id=25647652 https://news.ycombinator.com/item?id=25647652
leokennis 6y ago
I'm very far from an economist. But in school I learned banks loan out "your money" to companies, for which they receive interest, which they also use to pay you interest. So when loaning money requires 0% of interest payments, and saving money pays out 0% of interest...that seems wrong?
- TeMPOraL 6y ago
  Any amount of belief I had that I understand any of this has evaporated when I learned that negative interest rates are not only a thing, but also a thing we may all enjoy soon enough, and that they're apparently a good thing.
  - yoshyosh 6y ago
    Any additional reading on this that you can link/refer to that gave you that realization?
  - logicchains 6y ago
    >apparently a good thing. For a very loose sense of apparent. It's heavily debated, and there's no empirical evidence of greater growth in countries with negative rates, in fact countries with negative rates are generally experiencing lower rates of growth than they were with high rates, although it's hard to disentangle correlation and causation here.
  - Melting_Harps 6y ago
    > Any amount of belief I had that I understand any of this has evaporated when I learned that negative interest rates are not only a thing, but also a thing we may all enjoy soon enough, and that they're apparently a good thing. As someone mentioned before, their is far more to be discussed on the matter, but be under no illusion: 0 to negative % interest rates are a disaster waiting to happen. When savers are punished for their otherwise prudent behaviour for a rainy day, mainly because central banks are increasing the monetary supply to offset the lack of activity in M1 and M2 figures that are supposed to denote a healthy economy but do so in headlong manner, they are forcing people to spend money they don't have which in turn increases consumption rates (yet another critical metric in their calculus) and will create the all too common situation in which they cannot afford to not to spend it as it loses value (purchasing power) the longer you hold it in fiat: for context this is also why most cannot afford to have one unexpected expense and it ruins them financially as people as well as companies are looking for more riskier ways to hedger the depreciation to offset the lack of interest rates. And this applies to business and banks, as well as the citizenry. All of the EU technocrats are just doing the same thing the US Fedesral reserve has has been doing but from a less vantaged position since they do not have World reserve currency status, and despite their large geographical (in and outside of the Schengen Zone) EU pact footprint are still very reliant on Chinese imports and requires them to play the 'depreciate your currency' game of Russian Roulette to remain competitive in the export market and keep up with the machinations with the Yuan, USD, Yen, and now even the CHF! So to suffice it to say, no your feeling of bewilderment is not wrong, but your faith in these technocrat's fiscal policy requires far more scrutiny than you've given it because actually this is a disaster waiting to happen--they've already inflated the housing Market in N. America in some place to levels above where they were in 2007 before the crisis as a result of cheap money and lower interest rates. I think most people understand this in a latent manner but cannot understand why it is as the lack the understanding much less the time and resolve to look into it. The US stock market is at all time highs in the middle of a Global pandemic, recession and more and more people are out of work. None of this makes any sense, and Corporations get more bail out money especially in relation to the citizenry so its very perplexing, but it has to be said that Central banks can only do this because so much of the World is entirely ignorant on financial and fiscal matters, and in my opinion is purposely done and neglected in most formal education (and I include University as I've sat in lower division econ classes and had to walk out due to the absurdity) unless you're a masochist that is willing to put yourself through the immense pain of trying to understand it. But once you get to the Naked short selling, Re-hypothecation part and then compare it how much unfunded liabilities exists much of it as debt on blance sheets in the derivatives markets (yet another bizarro World situation) all over the World you start to realize that its the most evil, disastrous casino level ponzi scheme imaginable that has so many dire consequences for everyone except those created it as they ALWAYS come out on top in the end. In short: the fiat monetary system has been in a zombie state for over 100 years now and requires constant machinations (negative % rates are just one) to keep it propped to give it the illusion it 'works' which opens the door for banksters and other unscrupulous actors to game the system in their favour for immense short term gain to the detriment of the rest of us in these ever more severe boom and bust cycles. We should at least have the option to opt-out. I'm so much less worried about the future because of Bitcoin than I was even in 2007 as we were starting to head into the 2008 crisis where my anxiety levels were through the roof for years and which messed up my emotional, mental and physical health pretty badly to be honest.
deleted 6y ago
[deleted]
santoshalper 6y ago
Yeah, but I bet they make it up on volume.
ryndbfsrw 6y ago
Credit growth expands the money supply and stimulates economic growth so long as that expansion is ever increasing (park what that means practically). This mechanism of credit growth linked to some asset has been the largest driver of economic growth in the western world for decades. For the UK, where I live, the growth in household debt / gdp has been steadily increasing since the late 80s and I'd be surprised if its much different for other developed nations https://www.theglobaleconomy.com/United-Kingdom/household_debt_gdp/ https://www.theglobaleconomy.com/United-Kingdom/household_de... Countries that have come to rely upon their property markets for economic/political ends are likely going to come up with ever more elaborate schemes to maintain the above mechanism (UK, Australia, Canada and Denmark spring to mind). Indeed the unhealthy focus on the property market in the UK is a sign of the disconnect between real economic activity and asset inflation. Rationally this is an absurd mechanism for economic growth as it causes large divisions within society but its difficult to see these countries reverse course and what is more likely to happen is growth in private debt levels will level off and overall economic growth will stagnate similar to what Japan has experienced now for 3 (going on 4) decades.

45 points by SpaceNinja 6y ago

House prices are driven upwards due to low interest rates, so this move will most likely only exacerbate the already high house prices. I'm not sure about Denmark, but in Germany house prices have about doubled in the last 10 years, (with the ECB insisting there's no inflation). Given the choice between high interest rates and cheaper house prices, versus low interest rates and expensive houses, I'd rather take the former, since rates can always come down again, allowing you to refinance and pay less for your house overall. When (in the current environment) rates start going up again (they're basically at the lower bound now), house prices will fall, however home "owners" (with mortgages) won't pay less for their houses because their mortgages are fixed (and if they weren't fixed, they'd be doubly screwed by the high rates).

throw893232 6y ago
Little trick for a piece of mind: Recalculate prices and salary into gold. You will discover that things are more or less the same and stable. Shoemaker in 15th century made similar money as today.
- OscarCunningham 6y ago
  Given that the gold price has increased by a factor of 8 in the last 20 years it's hard to see how that could be true. Even if it happens that there's an equivalence between today and 1450, a shoemaker in 2000 would be earning 8 times more. EDIT: To put it another way, over the last 20 years the Dollar, Euro and Pound have all approximately averaged out to their target 2% inflation rate. Prices in gold terms have averaged to 9% deflation per year. Since 9 > 2, gold is less stable than modern fiat currencies.
- bdjfkrk 6y ago
  Not sure shoemaker is a good example. Wouldn't that today be Nike, Adidas, huge corporations and not individuals? An individual shoemaker today is probably in the luxury business.
BlargMcLarg 6y ago
Same thing in the Netherlands. Prices doubling. The monthly costs are similar to years ago, but the high barrier to entry makes it impossible for young people to get anything similar to previous generations for the same money. As a result, rent goes up and young people now pay much more rent than before, semi-forced. Low rates do not help when the market is this overheated. Worse, disincentivising people from prematurely paying their mortgage sounds like a great idea for recreating a certain crisis not too long ago.
- the-dude 6y ago
  Case in point : I owned a 300k house with my ex, we had a variable Euribor mortage taken out in 2004. With the Euribor at zero or below, the actual rate was close to 0.5%. Roughly translated to about €200 a month. Now I am renting, a third of the space, for about three times the money ( maybe even more ).
- firebacon 6y ago
  The average price of existing houses in the Netherlands increased by 55% since 2013. Source: https://www.cbs.nl/en-gb/news/2020/52/house-prices-almost-9-percent-higher-in-november https://www.cbs.nl/en-gb/news/2020/52/house-prices-almost-9-...
  - BlargMcLarg 6y ago
    I wouldn't call 55% in 7 years "only". Especially given this statistic doesn't highlight type of housing and price groups (read: housing in the far outskirts pulling averages down, though COVID is changing this dynamic). Starter wages have barely risen since then, let alone kept up. And along with the crisis, one now gets far less mortgage for the same inflation-adjusted salary than in 2013, despite the lower rates.
- jacobion 6y ago
  I think there might be two things going on here: one is a rise in various forms of social inequality, between generations, between people living in tier one cities and smaller cities or towns, between workers in certain industries and the rest. I tend to think this is bad, but I don't think it's related to interest rates. The other is the culmination of a fifty-year process set in motion when Western economies went from gold-backed currency to fiat currency, and then from political control of currency to independent Central Banks. During this period both inflation and interest rate have moved monotonically downwards, essentially both to zero. What if you assume that this state of affairs is strange because new, but perfectly benign, and will last indefinitely? It's absolutely true that those people who bought housing and other assets when rates were 10% have profited from a huge windfall. However, it's a one-off windfall. They simply got a discount, because 20/30/40 years ago, borrowing long term to pay cash was hugely burdensome. Today's homebuyers will buy assets at prices which reflect low interest rates, and they will pay low interest rates on their loans. As young workers, they might actually be better off in the long run. In a long term regime of zero rates, more of society's wealth is going to producers (and risk-takers), less is going to people who just hoard cash. You might think it's nice for society to do something to correct this one-off inequality. Maybe so, but it's not fundamentally different to the other inequalities which exist. In particular, it's unclear why either artificially raising rates or artificially raising inflation are the solution. Neither of these are particularly effective in helping people who have got the short end of the stick. Both benefit some groups of rich people and some groups of poor people, and harm some other groups. There are much better solutions which can be pursued by governments directly without political interference in currencies. Of course the type of person (job, family status, education level) who could buy a house in Berlin or London in the 1990's could not buy that same house today. You can either say 'too bad, you were out competed', or you can try to do something about it: pay teachers and social workers more, build more houses, make smaller cities more desirable to live in, provide better training and career opportunities etc. Blaming this on the dubious idea that cash in the bank should accrue 8% interest per year lets governments off the hook for actually solving the problems, and just advocates a different set of inequalities and broken incentives.
throwaway-8c93 6y ago
> with the ECB insisting there's no inflation House prices are represented in the consumer price index as 'imputed rent', generally by far the highest weight item. Last time I checked, its weight was at 9%.
frafra 6y ago
You are right about the house prices in Germany, but your statement about ECB is not entirely correct. ECB does not "insist there is no inflation" in Germany or in Europe: in both cases it has been around 2 % for the last 20 years: https://portal.dataviz.ecb.europa.eu/views/HICP_dashboard_ETS_16049391112180/InflationDashboard https://portal.dataviz.ecb.europa.eu/views/HICP_dashboard_ET... There is a reason why the ECB estimation of inflation (HICP) seems lower than expected in your experience: it does not take into account owner-occupied housing (OOH) prices, which include O.1.1.1.1 (Purchases of new dwellings index). Mario Draghi (former resident of the ECB) was in favour of that, but the European Commission thinks that OOH is not suitable to be included in HICP yet. References: - https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2018-768-F1-EN-MAIN-PART-1.PDF https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2... - https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter180615_Loones.en.pdf?c70e96e017400693be88594080334077 https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter180615_...
- bjeds 6y ago
  I may be tired or dumb, but your argument sounds circular to me. Of course the ECB won't insist there is no inflation if they themselves have defined housing to not be included in the definition they use to measure inflation. This doesn't mean that the parent commentator is wrong nor does it imply that ECB is correct in their definition. For most people, housing is a significant cost in day to day life, and will of course be felt as inflation, regardless of how it's defined and measured in monetary policy. If it were up to me, housing should also be included in the definition of inflation. That would be a good way to lay bare the downsides with an aggressively expanding monetary policy.
  - frafra 6y ago
    It is not a circular argument to show that a statement is not correct: ECB never said there is no inflation in the first place. ~2% is not "no inflation"; 2% is the target that the ECB aims at. In addition to that, I added an explanation why such a number seems lower that you could expect. Please note that ECB does not define the HICP, the European Commission does it: https://ec.europa.eu/eurostat/web/hicp/faq https://ec.europa.eu/eurostat/web/hicp/faq
pizza234 6y ago
I'm very skeptical at the following claim, if taken at face value: > Germany house prices have about doubled in the last 10 years In the capital, prices 10 years ago were extremely low. People who bought apartments between 10 and 20 ago bought them as low as 1000€/sqm, which is exceptionally low for a European capital. Under such conditions, price doubling is expected independently of any policy.
- martin_bech 6y ago
  German housing is a litle different, as many prefer to rent, so less demand for beeing an owner.
  - p1esk 6y ago
    Why do they prefer to rent?
    - allendoerfer 6y ago
      After WWII the German government created strict renter protection laws and the state invested heavily in relatively high quality public housing. You can compare the results to the UK, which cities were also bombed, but invested in private housing instead. Germany also famously had been "the sick man of Europe" before the current boom, were real wages did not rise for a long time.
  - raxxorrax 6y ago
    True, if I have no chance to finance it, you prefer renting compared to homelessness. But workplace mobility, yeah!
- Cthulhu_ 6y ago
  10 years ago was the peak of the housing bubble collapse (or just after), so the price of houses was depressed for a while. That said, housing prices have gone up by ridiculous amounts since then, in part thanks to economic recovery, in part due to low mortgage interest rates, and in part (linked) due to low savings account rates. Better to put that money in real estate (and more risky investments on the stock market) than let it wither in a savings account. But hey, for a while a few people made a lot of money.
martin_bech 6y ago
You are right, houseprices in denmark are going crazy.. But makes sense since 0% fixed mortgages.. you can get a 30year fixed at 0.5% with the option of only paying the interest, for the first 10years
PartiallyTyped 6y ago
I am paying a 950 euro rent for a <24 sq meters in Copenhagen, not downtown Copenhagen, inc water/electricity/heat/washer/drier. The situation is absurd. Back home (still in Europe) I paid half for 35-40 sq meters. Yes, the salaries offset some of it, but still..
- Cthulhu_ 6y ago
  The salaries you're eligible for offset some of it, but there are a lot of people that have to get by on minimum wage in the big cities as well. Instead of making mortgages more attractive, I think governments should increase minimum wage. If they do a correction to match up with inflation (and cost of living, since the two don't seem to align), suddenly minimum wage will jump to €30/hour.
- jacobion 6y ago
  Why do low interest rates cause high rents? High house prices sure, but why does it affect rents? You prefer to live in Copenhagen than the part of Europe you come from, for the higher salaries among other reasons. Probably lots of other people share your preference. Doesn't this suffice to explain why rents are much higher in Copenhagen than in your home region?

tormeh 6y ago

So, the stock market gives amazing returns, but debt is free? We must have absolutely massive asset price inflation, even if we have no consumer price inflation. I wonder if central banks are looking at the right metrics.

jariel 6y ago

Can you say 'housing inflation'? All this does is introduce more monetary demand for housing, increases prices, and stretches out credit putting further distance between those with no homes, and those with the biggest. Housing may be one of the largest drivers in personal wealth in our era - the more you can afford for a down payment and payments, the greater your financial leverage over those with less leverage. And of course, renters are left in the lurch with higher prices. A smarter plan might be to limit the term lengths of mortgages to 15 years, and to frankly increase (and stabilize) interest rates on homes. If interventions are what you want to do ... FYI money will come out of regular consumption and get plowed into real-estate, which is mostly a non productive asset.

Codes 6y ago
The inflation is only a problem in the biggest cities (eg. cph, Odense, Aarhus) In some parts of denmark the prices actually goes down (Southern jutland) I live 80 km's from Aarhus and my house has only gained 7% in value over the last 6 years.
- lotsofpulp 6y ago
  It’s the same in the US. Prices in vast areas are stagnant, but some areas skyrocketed. It’s just an exacerbation of the growing wealth/income divide.
IkmoIkmo 6y ago
In virtually all countries, the size of the mortgage allowed is based on capacity to carry debt, by law or by market practice, and expressed as the percentage of monthly income that may be used on a mortgage, which is capped. That means increasing interest rates and halving the payback time will massively increase monthly cost to carry debt / monthly mortgage payments. Given the cap, that means people can borrow much less. Their ability to buy or afford a home does not improve. Why would that be preferable? What you'll also achieve is that those with cash now will have a big advantage over those without cash, but with a stable income, who're willing to work for 30 years, because mortgage-based buying becomes less interesting. Lastly, you'll make sure that much less capital flows to real estate, which means it's less interesting to build more of it, reducing the long-term supply, and exacerbating the housing shortages you see in many countries. And you're doing all this, artificially. Set interest rates above market rates. Set loan terms to max 15 years, while a 25 year old will need to live somewhere after 40, too, and is fully capable to take on a loan at 41, or 51, or beyond. There's simply no easy solutions to this issue. This idea that messing with interest rates will magically solve things is myopic. What I will agree with is this: make owning or renting fiscally neutral. In many countries, home owners get subsidies, tax breaks, interest rate deductions, while renters don't. That must be stopped. Second, we need to consider government policy to deter hyper-concentration, i.e., in many countries, the 5% top-1 tier cities get 25% of the investments/attention/projects/jobs/universities/infrastructure. That leads to massive demand in a few spots, and a brain/capital drain from the rest of the country. Because land is finite, it makes no sense to concentrate all economic activity in one or a few cities. Cities are efficient and necessary, but tier-2 and tier-3 cities need more attention to spread people around more. There's actually plenty of housing, but some of it costs $500 per square foot, and some $50. That must be balanced more. Third, national government should exert its power more over local governments to be more accommodating, e.g. when it comes to zoning, building laws, density etc. Local government is often captured by existing home owners, which must be heard, but whose voice is currently overpowering generations of future citizens who outnumber them and aren't being accommodated. You have an industry captured by NIMBYism, and local government has no governance model to give future citizens a voice. In a municipality with 60% single family owner-occupied homes who wish to keep construction low, vs 30% long-term renters and 20% transient renters, and 500% future renters, who wish construction to increase, the current democratic governance model keeps favouring the 60% SFH owner-occupiers. But it's not necessarily a net benefit to society, or the most democratic outcome.

bfwi 6y ago

This is not truly a 0% loan. Because of the fees, you will pay a minimum of 0,74%. Also because these mortgage instruments are traded at a price less than 100, you have to take out a loan larger than the amount of money that will be payed out. For example, to loan $100 you might have to take out a loan where you start out owing $105, which further increases the actual interest.

brtkdotse 6y ago

This is nuts. Housing inflation is rampant, I live in Sweden and my house value increased 40% in 5 years. We currently pay less per month for our 250 m2 house than my parents pay for their 75 m2 rental apartment.

ChuckNorris89 6y ago
Jesus, can yong folk afford to buy anything at this point?
- Gwypaas 6y ago
  Downward pressure and stability margins have been added recently by forcing people to amortize their loans, seemed to cool the market for a year or so until continuing to increase. Loans above 70% of value needs to be amortized by 2% per year. Loans above 50% of value needs to be amortized by 1% per year. If your house loan is more than 4.5 times your yearly income, regardless of the percentage, then you need to amortize another 1% per year until below it. This has of course made it even harder for young people to enter the market, but it seems to make for an overall more healthy long-term market in the current debt climate. For many the hardest part is the by law required 15% down payment, this can be financed by private loans but that comes with it's own catches. Many instead end up relying on parents who has ridden the wave taking out a loan on their home, if you are fortunate enough to have home owning parents.
  - brtkdotse 6y ago
    Agree, and to add some context, a lot of people have parents who’s mortgage was all but eaten up by 15% inflation in the 80s.
- throwaway-8c93 6y ago
  I don't want to be the spoilsport, but yes, they very much can and it's not even that difficult. Case in point: I moved to Finland as an immigrant 9 years ago, with nothing but a backpack, girlfriend and $12k in my bank account. Within 7 years, we paid down the mortgage for 100 m2 house in the capital area, while raising two children, with one above average and one below average income. And I don't feel like we were materially deprived in any way. I think the main culprit is couples settling down way too late in their lives. Instead of settling down at the age of ~25 and combining two incomes to pay off the mortgage principle, we have two adults, each paying ~$700/month rents. When they finally move together at the age of ~30, that's almost $100k that went down the drain. The baby-boomer generation used to move together at even earlier ages, 19-22.

arnon 6y ago

Earlier discussion from yesterday: https://news.ycombinator.com/item?id=25647652 https://news.ycombinator.com/item?id=25647652

leokennis 6y ago

I'm very far from an economist. But in school I learned banks loan out "your money" to companies, for which they receive interest, which they also use to pay you interest. So when loaning money requires 0% of interest payments, and saving money pays out 0% of interest...that seems wrong?

TeMPOraL 6y ago
Any amount of belief I had that I understand any of this has evaporated when I learned that negative interest rates are not only a thing, but also a thing we may all enjoy soon enough, and that they're apparently a good thing.
- yoshyosh 6y ago
  Any additional reading on this that you can link/refer to that gave you that realization?
- logicchains 6y ago
  >apparently a good thing. For a very loose sense of apparent. It's heavily debated, and there's no empirical evidence of greater growth in countries with negative rates, in fact countries with negative rates are generally experiencing lower rates of growth than they were with high rates, although it's hard to disentangle correlation and causation here.
- Melting_Harps 6y ago
  > Any amount of belief I had that I understand any of this has evaporated when I learned that negative interest rates are not only a thing, but also a thing we may all enjoy soon enough, and that they're apparently a good thing. As someone mentioned before, their is far more to be discussed on the matter, but be under no illusion: 0 to negative % interest rates are a disaster waiting to happen. When savers are punished for their otherwise prudent behaviour for a rainy day, mainly because central banks are increasing the monetary supply to offset the lack of activity in M1 and M2 figures that are supposed to denote a healthy economy but do so in headlong manner, they are forcing people to spend money they don't have which in turn increases consumption rates (yet another critical metric in their calculus) and will create the all too common situation in which they cannot afford to not to spend it as it loses value (purchasing power) the longer you hold it in fiat: for context this is also why most cannot afford to have one unexpected expense and it ruins them financially as people as well as companies are looking for more riskier ways to hedger the depreciation to offset the lack of interest rates. And this applies to business and banks, as well as the citizenry. All of the EU technocrats are just doing the same thing the US Fedesral reserve has has been doing but from a less vantaged position since they do not have World reserve currency status, and despite their large geographical (in and outside of the Schengen Zone) EU pact footprint are still very reliant on Chinese imports and requires them to play the 'depreciate your currency' game of Russian Roulette to remain competitive in the export market and keep up with the machinations with the Yuan, USD, Yen, and now even the CHF! So to suffice it to say, no your feeling of bewilderment is not wrong, but your faith in these technocrat's fiscal policy requires far more scrutiny than you've given it because actually this is a disaster waiting to happen--they've already inflated the housing Market in N. America in some place to levels above where they were in 2007 before the crisis as a result of cheap money and lower interest rates. I think most people understand this in a latent manner but cannot understand why it is as the lack the understanding much less the time and resolve to look into it. The US stock market is at all time highs in the middle of a Global pandemic, recession and more and more people are out of work. None of this makes any sense, and Corporations get more bail out money especially in relation to the citizenry so its very perplexing, but it has to be said that Central banks can only do this because so much of the World is entirely ignorant on financial and fiscal matters, and in my opinion is purposely done and neglected in most formal education (and I include University as I've sat in lower division econ classes and had to walk out due to the absurdity) unless you're a masochist that is willing to put yourself through the immense pain of trying to understand it. But once you get to the Naked short selling, Re-hypothecation part and then compare it how much unfunded liabilities exists much of it as debt on blance sheets in the derivatives markets (yet another bizarro World situation) all over the World you start to realize that its the most evil, disastrous casino level ponzi scheme imaginable that has so many dire consequences for everyone except those created it as they ALWAYS come out on top in the end. In short: the fiat monetary system has been in a zombie state for over 100 years now and requires constant machinations (negative % rates are just one) to keep it propped to give it the illusion it 'works' which opens the door for banksters and other unscrupulous actors to game the system in their favour for immense short term gain to the detriment of the rest of us in these ever more severe boom and bust cycles. We should at least have the option to opt-out. I'm so much less worried about the future because of Bitcoin than I was even in 2007 as we were starting to head into the 2008 crisis where my anxiety levels were through the roof for years and which messed up my emotional, mental and physical health pretty badly to be honest.

deleted 6y ago

[deleted]

santoshalper 6y ago

Yeah, but I bet they make it up on volume.

ryndbfsrw 6y ago

Credit growth expands the money supply and stimulates economic growth so long as that expansion is ever increasing (park what that means practically). This mechanism of credit growth linked to some asset has been the largest driver of economic growth in the western world for decades. For the UK, where I live, the growth in household debt / gdp has been steadily increasing since the late 80s and I'd be surprised if its much different for other developed nations https://www.theglobaleconomy.com/United-Kingdom/household_debt_gdp/ https://www.theglobaleconomy.com/United-Kingdom/household_de... Countries that have come to rely upon their property markets for economic/political ends are likely going to come up with ever more elaborate schemes to maintain the above mechanism (UK, Australia, Canada and Denmark spring to mind). Indeed the unhealthy focus on the property market in the UK is a sign of the disconnect between real economic activity and asset inflation. Rationally this is an absurd mechanism for economic growth as it causes large divisions within society but its difficult to see these countries reverse course and what is more likely to happen is growth in private debt levels will level off and overall economic growth will stagnate similar to what Japan has experienced now for 3 (going on 4) decades.