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Danish bank launches negative interest rate mortgage (theguardian.com)
248 points by neka on Aug 14, 2019 | hide | past | favorite | 149 comments

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:


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


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.


Low, but not negative.

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:


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.

>These bonds are considered to be very stable, about the same quality as state bonds

>can usually recover most of the money through a forced sale

This exact line of thinking is what led to the US real estate crash in 2008/2009

It's a gross simplification, but with the volume that is Danish housing vs demand for said housing the risk is very low.

One of many issues leading into the 2008 crash was how Us mortgages were bundled, rated AAA, then resold as an investment tool. However, the ratings were falsely boosted to promote investment and when the underlying junk mortgages fell through and demand fell off a cliff with the rest of the economy there was no way to flip foreclosed housing to make up losses.

In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008. Current US auto loans may be much more similar than these Danish loans.

> In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008.

Danish loans are definitely securitized and sold as investment tools. They are a classic interest rate risk hedge.

It’s been a while since I was adjacent to them but the bigger difference in Danish mortgage backed securities were a) no governmental guarantee on them b) less protections for the borrowers than in the US c) no derivatives d) much smaller market & e) much longer history.

So credit risk, which is what ratings agencies nominally judge is likely not a problem.

Interest rate risk is though, but given its more straight forward, it’s what investors are looking for exposure to & there is low leverage it’s unlikely to cause systemic collapse.

low leverage in proportion to the total asset value

But what’s that total asset value if interest rates are 10% (vs -1%)?

Well in principle yes, but in reality no. The Danish system for financing real estate have historically been extremely stable. Olau explains it above

That’s true, except that you can only get a loan in Denmark if you have 20% of the purchase price to put down as collateral. That means sub prime mortgage lending doesn’t exist in Denmark and that combined with liar/NINJA loans was a substantial contribution to the US housing crash, together with securitisation. If it had been impossible to securitise mortgages with less than 20% down in collateral the housing crash would have been a non event in the financial markets.

> 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)

From olau's explanation, it seems that there is enough money flowing, that more than 80% can be financed (in some way) even if it is not in a single or collateral-backed loan.


I think the situation currently is that you need 5% in downpayment yourself, then the bank can supply the 15% (at a much higher, individual rate) and the real-estate lender will provide the most secure 80%.

This is not really my area of expertise, and it's unclear whether you're basing this comment upon an actual analysis or it's just a quick remark?

I was trying to explain how the bond rates can go so low.

The real-estate lenders have rigid policies in place as for who can get a loan.

Of course, enough correlated failures, and the system goes down.

But there was a crashing housing bubble in Denmark too in 2008/2009, and to the best of my knowledge none of real-estate lenders went down, although they did increase their fees to cover losses. Banks were crashing, though, until the bailouts started.

I personally think that the overall system would be more healthy if the real-estate lenders and banks in general did not protect their investors against losses, but just passed them on so you avoid this sure-everything-is-fine until it crashes. But again I don't know much about the banking world. Maybe that idea is too complicated.

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.

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.

US banks have proven (to themselves at least) that they can get away with sub-1% savings rates for long term, regardless of what the Fed rate is.

The first one to do it will be a pariah (briefly) but the next 5 will be "just following the trend" - the question is who will be first?

That sounds similar to how Mortgages used to work in the UK in the 60s.

One would get a mortgage from a Building Society for around 75% of the property value, and had to get a Bank Loan for the remainder which they couldn't cover from savings.

What has changed? How do mortgages work today in the UK?

We had 100% mortgages (no deposit) in the run up to the crises.

We even had 100%+ mortgages for a time which included a loan on top of your mortgage to modernise and furnish your property.

Nowadays, 5% deposit mortgages are available but 10% is more typical. We also have a popular government “help to buy” scheme which some think is reckless as it allows people to get into a more expensive new build home (which typically fall in value after first occupier) with a 5% deposit.

A loan for your deposit would not be acceptable as the mortgage company want to see you have skin in the game.

UK housing market is a complete mess and in my mind hugely overvalued. The can has been kicked down the road for over a decade now. If I didn’t have a family who needed secure housing situation I would sell to rent in a heartbeat.

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)

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

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

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.

Housing prices normally aren't a part of the inflation calculation.

"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 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 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.

- 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.

> Normally as in almost everywhere in the world (apart from a few places like Sweden I think?)

Aren't you contradicting yourself when you go on to say that both the US BLS and Eurostat do include housing in their indices?

> statisticians either only include rents [or] “owners equivalent rent”

OK. So housing is part of the CPI, yes?

If I understand https://www.ecb.europa.eu/stats/ecb_statistics/escb/html/tab... correctly, Eurostat weights "actual rentals paid by tenants" at 6.1%. (edit: ECB, not Eurostat)

> none of it is house prices

This is the first mention of "house prices" in this thread. The index linked in the ancestor comment called itself "housing", not "house prices". Good for you if you insist on making the difference, but then if you make the difference you are not talking about the thing I was talking about, I think.

Also, some of it is house prices if house prices factor into the "owners equivalent rent", or is that made up out of thin air? Also, rising house prices cause rising rents, so indirectly they are represented anyway.

This is without up to date fact checking so take this with a grain of salt, but during the last housing crisis I remember looking this up and came to the conclusion above. I don't actually know if it's universal but it was valid for Sweden at that point in time. I think the key word in your text above is "expenditure", where a house maybe isn't seen as an expenditure but rather an investment..?

When taking about inflation it's also always good to remind one self that the pool of money also changes. And the fact that housing usually is connected to mortgages, which in turn expands the amount of available money. But this paragraph has nothing to do with your comment so I'll just stop there!

Thanks for your comment. I was a bit intrigued, also in light of the sibling discussion, so I tried to look this up without spending too much time on it.

This document "How is inflation measured?" from the Riksbank: https://www.riksbank.se/globalassets/media/rapporter/ekonomi... doesn't give weights in general but does say this (emphasis mine): "the method in which housing costs for owner occupied housing are measured are an important source of non-comparability, partly because they make up a large proportion of the CPI (around 10 per cent in sweden)". Note the "owner occupied" part, so this isn't even just rents! But then I don't understand the rest of the discussion that follows this.

Also Statistics Sweden at https://www.scb.se/en/finding-statistics/statistics-by-subje... lists "Housing, water, electricity, and fuels" as one of the "main groups" in the CPI, though this only suggests but does not prove that housing does have a non-zero weight.

"The inflation rate" generally means CPI-U[1] in the US or some similar "basket of goods" in other areas. So, this is correct, as we're usually looking at urban consumers, it would include rent but not housing.

As another poster mentioned, though, inflation or deflation as general concepts can refer to any price or cost that increases or decreases.

[1]: https://www.bls.gov/news.release/cpi.t01.htm

> 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.

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.

>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.

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).

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.

Not really. “As a result, oddities now abound. Danish lender Jyske Bank last week issued a 10-year mortgage bond at an interest rate of minus 0.5 per cent, meaning homeowners are being paid to borrow.”

In fact the providers of the capital will pay the bank for those mortgage-backed bonds (they get a negative yield). The bank will get some spread from the client, who will also pay.


Don't forget the mortage runs for 30 years and after 10 years, you are forced to pay the rate at that moment... so in the end, it will be ok :)

There no rule that the mortgage will run for 30 years. It’s just what most people choose. But there’s nothing stopping anyone from paying back the entire mortgage in 10 years.

> But there’s nothing stopping anyone from paying back the entire mortgage in 10 years.

Apart from not having the money.

I can't find all the fine details on this loan, but there are definitely loans that stop you from prepayment, or at least have a penalty associated with them. These penalties can be pretty large and definitely are a reason not to pay back the entire mortgage before 10 years. In this exceptional case I'm assuming there is a prepayment penalty for a large portion of that 10 year fixed rate period.

The discussion is about 10-year fixed rates. After 10 years you can either refinance or pay (and it’s not an anticipated payment), or maybe it’s already stipulated that the rate after 10-years is floating (but then cancellation is also much easier than in the middle of a fixed-rate mortgage).

Those prepayment fines are basically what the bank is losing out on you. If you have a 3% mortgage and the current rate is 2%, then the bank would lose out 1% for the current mortgage period. That's the penalty.

That is not how the penalties are worded at all. Penalties are usually in the form of a percentage of a number of months' interest. I understand the fine is because the bank makes money on loans by being able to rely on them being a fixed long term, and the cancellation affects that, but it's not just the bank passing on that percentage loss directly.

Perhaps it's a country thing. Here in the Netherlands that is how the banks calculate the prepayment fine. You are allowed to pay off 10% to 20% of the original sum per year but over that amount you pay a "boeterente" (interest-fine). It's equal to the amount of money the bank loses by loaning your money to someone else over the remainder of the fixed period (10/20/30 years).

It's pretty ridiculous if the penalty isn't specified by the contract...

Whatever new rate you might get is not the business of your previous loan holder.

They are specified in the contract. If you sign the mortgage contract you are giving the bank steady business for the next 10 years in return of a lower rate. By breaking that 10 year agreement the bank loses money which they will charge you for.

If the early payment penalty is based on the current rate, then it's not what I mean when I say "specified by the contract".

It all depends on the contract. You can get a not-so-low rate that gives you the option of prepayment (with some fixed penalty).

I should have been more clear in my comment. What I meant was: There is no requirement that the maturity of a mortgage should be 30 years exactly.

No. That is not the case. The negative interest in this case is for loans over 10 years. If you want to have it over 30 years you still have to pay one percent.

Did you read the actual page? It says on the banks FAQ that "You can now get a fixed-rate mortgage with a maturity of up to 10 years, where the nominal interest rate is negative.". So the opposite of what you said.

Could you refinance in say 5 years if rates were still negative then to get locked into 15 years of negative interest rates? Not sure on the mortgage market in Denmark, but in the US, refinancing mortgages common and is an industry of its own.

Generally a fixed term has a worse rate for the borrower than the floating rate (assuming the floating rate isn't expected to change hugely in the future).

As a rule of thumb if you refinance from a fixed rate to a better rate you have to pay penalty fees if the rate is worse for the lender (better for you) relative to how much the lender would have made off you if the loan had continued at the previous rate. Because of this it only really makes sense if you can save money on the loan due to other factors that current market rate i.e. being able to pay of your mortgage at a faster rate, your credit rating has improved (or equivalent lending criteria), the lender is noncompetitive compared to the rest of the market, you believe the floating rate will decrease further in the short term and want to refinance to a floating rate before the penalties increase to match (though you'd be outguessing the rest of the market).

Refinancing from a floating rate or a fixed rate that is better(for you) than the market rate will have no or low penalties as your basically already paying market rate or worse and the lender has little downside in getting their money back.

So realistically if you believe that in 5 years the interest rate will be the same or lower you should be floating (or at least negotiating 5 years fixed instead of 10) and then you could negotiate for a lock in at that time.

In Denmark, if you have a fixed-rate mortgage, you are always allowed to buy back the bonds at their nominal value. For that reason, you absolutely can save money by refinancing when the the interest rates go down (you still have to pay some fixed fees in order to do so). The funny thing is, that you can sometimes also save money when the interest rate goes up, because in that case you can buy back the underlying bonds at less than their nominal value. The savings in this case come in the form of tax savings, because you can deduct the (higher) interest.

> you are always allowed to buy back the bonds at their nominal value

That’s very surprising. Do you have a reference in English?

Edit: nevermind, I’ve found that’s indeed the case and those are callable bonds (so the prepayment risk is included in the price).

Just switch after 10 years?

It seems like a (cynical?) way to turn today's overpriced real estate assets into a stream of payments. Someone purchasing a home for DKK 300K with no interest may think they're getting a deal, until they try to resell that home and find out they cannot sell it for more than DKK 240K.

That would imply we're getting into a weird deflationary regime where money shrinks under negative interest rates, yet still buys more in the future!

The idea of injecting money into the economy by lowering interest rates works but people usually only get loans for houses or cars. No one buys their groceries with loans so they are ineffective at increasing prices in consumer goods and thereby lowering interest rates does not affect inflation despite the massive cash injection.

> No one buys their groceries with loans

Many people do. Credit Cards and Credit lines.

Nobody in Europe does.

But I wonder if credit cards will follow suit and offer negative rates. Somehow I doubt it, though.

Nobody in Europe does.

Bullshit. It's not as popular as in the US, but it's not like credit cards are unheard of here.

At least in Italy, Spain and Germany people mostly use debit cards, and usually not for groceries, but for online purchases.

They're not unheard of, but most people use them primarily for international online payments, and not for groceries.

> injecting money into the economy by lowering interest rates

But there's still interest rates? People still lose money by taking out a loan to buy a car.

The reason nobody takes a loan for groceries is because groceries are cheap! There's 0 point in taking a loan for groceries unless you literally have no other money.

Meanwhile many people can't afford to buy a car/house with cash, so they're forced to take a loan (and lose money in the long run)

In principle low rates increase economic activity, production, labor demand, wages and prices (but it’s true that the theory is not working well lately).

kind of the opposite of stagflation


You seem to feel that housing is overvalued in Denmark in general, by your comment: "Someone purchasing a home for DKK 300K with no interest may think they're getting a deal".

I imagine that housing in Copenhagen is similar to Amsterdam, and has been appreciating quickly.

From an international perspective, I think it can be argued that these locations are still undervalued. They're still somewhat affordable to local tech workers, whereas in locations like SF, NYC, LA, Toronto, London, etc.. they're not. And from the perspective of Americans, or say people in Hong Kong, these properties are remarkably cheap due to your socialized economies.

I'm still surprised that foreigners haven't purchased all of the real estate in the city centers of Denmark and the Netherlands.

Buying a house means taking over a payment and tax liability, it's not just about owning and controlling an asset. Confidence in the financial system is apparently so low that someone is willing to pay you fictitious money now in return of fewer actual cash in the future.

What am I missing here? why are they doing this? There has to be some other gain somewhere else.

It's fixed for 10 years. So yes, it's underperforming right now, but the fact that the yield curve has inverted gives them good reason to believe that there's going to be a recession in the next 10 years, so actually this is a relatively good return compared to losing money in the stock market or losing even more by buying the 10 year govenrment bond which right now is paying -0.58%.

why can't they just sit on the money? Wouldn't that perform better?

The gain is they will loose less than borrowers.

Not the world's first at all. https://tradingeconomics.com/switzerland/interest-rate

Switzerland has been negative for years.

Negative interest rates mean only 1 thing. The central bank is 100% confident that they are on the brink of deflationary spiral; much like Greece or Japan.

This is all connected:




When you are above 100% disposable debt to income. It means you must stop spending or your debt continues to increase. 170% is worse than the USA's financial crisis. Other countries like Australia are up around 200%.

We have reached a long term debt cycle. We are about to have one of the worst recessions in a very long time OR depression.

> The central bank is 100% confident that they are on the brink of deflationary spiral; much like Greece or Japan.

Is this a good thing for people who hold cash assets? Meaning, would you be able to buy say a $40,000 car for $20,000 in case this happens?

That's the problem in Japan. That $40,000 car will be say $38,000 next year; so why would you buy it now?

The problem is that when people do that, it means people arent spending money resulting in more deflation.

been told I should worry about it for years now, but Australia's economy hasn't broken yet (it's weak, but that just means it's doing better than comparable nations but less than what it could be if we weren't being mismanaged by the most incompetent government this side of the black stump). how can I rely on a forecast that is eternally bad? I guess the economy will turn sour eventually, but I can't rely on a prediction that's always bad news since I'll miss all the good.

>been told I should worry about it for years now

There was people mid financial crisis who were still denying the recession. There are tons of people who are saying we are going to have a recession during market highs.

>but Australia's economy hasn't broken yet (it's weak, but that just means it's doing better than comparable nations but less than what it could be if we weren't being mismanaged by the most incompetent government this side of the black stump).

I'm not Aussie; love Australia though. Politics aside, that's the thing people don't understand right before a debt cycle. Housing prices go sky high, car manufacturing dies, debt becomes tremendously cheap, manufacturing isms crash or contract, prime rates usually just went up, unemployment at historical lows.

Literally all these indicators are pretty strong indicators and ALL of them are happening.

>how can I rely on a forecast that is eternally bad? I guess the economy will turn sour eventually, but I can't rely on a prediction that's always bad news since I'll miss all the good.

That's more a perspective. If you watch CNBC, they literally didn't believe the financial crisis was happened and it has been a bull market since forever. Zerohedge on the otherhand will have an article a day explaining how society's downfall is upon us.

The important thing to understand is that literally nobody has a clue what's going to happen.

We may never have another recession; ETFs and passive nature of investing could lead to markets just being completely stable from now on. Bitcoin could be the one picking up all the volatility, leaving the stock markets stable.

Personally I think the debt cycle is immutable.

One person's spending is another person's paycheque. When the automotive sector has basically started laying off people because people aren't buying cars; and it's happening to all Euros, Japanese, and North America car manufacturing companies are all laying people off. That's the beginning of the cycle downturn.

Just listened to this Bloomberg podcast, where they interviewed Viktor Shvets on the meaning/implications/future of negative interest rates: https://www.bloomberg.com/news/audio/2019-08-09/what-negativ...

> He argues that undermining the ’time value’ of money–or the principle that money available now is worth more than money in the future because you can use it to earn additional money–won’t lead to economic growth. In fact, he says, negative rates are going to end up leading to a rethink of modern capitalism and political society once people realize they have big consequences.

Isn't that also why economists think excessive inflation is bad? Because it undermines the "time value of money"?

So to avoid inflation, instead of printing money, we lower interest rates.

But once interest rates go below 0, that also undermines the time value of money.


Lower rates cause increased inflation. Rates are lowered by increasing the price of bonds, by buying them, e.g. "printing money".

Is this good or bad? I don't understand how this can happen unless money itself loses nearly all value (i.e. storing the paper isn't even worth it, like in Germany after WWI). Can someone explain further?

Well, the pile of money that exists is much, much smaller than the value of everything in the economy. So at some level, it's not possible to convert your holdings to cash and sit on it. You need to hold "cash" in the form of bonds.

Even if you could hold paper cash, you'd still need to store and secure it, which costs money.

When looked at through that lens, it makes more sense. Rather than giving someone a loan that you expect to get paid for the risk, you're asking them to hold your money for a while, and they are expecting to get paid for the risk (of having to pay you back more in real terms than you lent them).

It doesn't mean the paper is worthless. On the contrary, the paper is more valuable than many other investment means. You are effectively paying a bank to guard your money with a negative rate, which makes sense. Guarding and protecting currency is not an easy task for an individual or business.

Negative interest rates are supposed to spur investment elsewhere. However, negative rates have not led to the desired economic expansion in places like Japan that have had them for years.

Inflation is very low in Denmark, near a deflation point, which is generally considered bad. The bank is trying to spur inflation with these negative rates.

It will be interesting to see what happens if the US ends up with negative interest rates. Japanese and EU banks won’t have assets they can buy to get yield from, nor will the US.

One could consider something like a Gold ETF where a percentage of the gold is sold every year to pay for the cost of storage as a negative interest rate cash alternative. You lose money every year too, but central banks can’t print it.

Money losing its value would be even worse for negative-nominal-rate lending. In a high/hyperinflationary environment, you'd look to hold easily stored goods that maintain their real value, and thus cancel inflation.

What would explain the current scenario, where lenders will lend at negative rates, is:

a) investing opportunities suck, and

b) they can't reliably hold their dollars/kroners anywhere cheaply.

So in a hyperinflation scenario, money could be losing value faster than the negative interest rate, so you're basically paying someone else to take on that risk/loss.

That makes sense, although another commenter said inflation in Denmark is very low right now, so it doesn't seem to apply here.

>So in a hyperinflation scenario, money could be losing value faster than the negative interest rate, so you're basically paying someone else to take on that risk/loss.

No, that still wouldn't favor this kind of lending, because the contract is specified in nominal terms, so you end up with less, even in that sense; it would always make more sense to buy something that holds its real value.

Now, if you were paying someone $1 to give you a can of tuna in a year, when tuna cans currently sell for $0.99, that might make sense in hyperinflation, because you'll get one tuna can worth of real value then, which you could legitimately value more than the dollar today.

But that's not what's happening here. They're paying $1 for $0.99 a year later. [1] There are very few scenarios where that makes sense, and especially not hyperinflation, where the $0.99 will only buy a hundredth of a can of tuna in a year.

[1] Not that specific ratio, just using those figures to keep the example simple.

Negative interest rate will increase house asset prices as you will get money to loan. When there will be inflation due to outside forces a lot of home owners will have loans under water. The banks will be saved and there will be new regulation promising never again. Until the next bank crisis for different reason and so on.

I think you get the effect wrong.

Notice that these are fixed rate loans:

>0-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.

Increasing inflation would help those who have taken fixed rate mortgage loan because the real value of their loan will decrease faster.

Thanks insightful comment. Increasing inflation will help pay of the loan as it will get lower through inflation.

I personally think central banks have not understood that lower interest rates decreases inflation rate. Ie normally and historically central bank would try to increase inflation by lowering interest rate and thus how many have jobs. But jobs are now done automatically by software robots and that get cheaper by lower interest rate to invest in. But central banks thinks lower interest rate will increase inflation.

The problem is not that lowering the interest rate has stopped increasing inflation, it's that central banks can't lower real rates enough. They are facing so called zero lower bound problem: https://www.investopedia.com/terms/z/zero-bound.asp This is called liquidity trap.

You can set the interest rate little bit below zero, but you can't go significantly below zeor or banks just start storing cash in vaults (it becomes economically viable to physically store vast amounts of cash). You can actually think these zero or negative rate mortgages as bank's way to store capital.

I don't think the root cause is financial or monetary policy. Developed countries are aging and their economic dynamics is fundamentally changing and they become prone to having secular stagnation. Japan led the way, Europe and the US will follow.

Why doesn’t the danish govt just print more money? Although part of the eu, they opt out of the monetary policy and still use the kroner. OTOH, how much of the eu debt does Denmark own— and vice versa. If they affect the kroner-euro exchange rate then they could lose money if it moves the wrong way.

This situation (negative interest rate) occurs because there is a capital surplus.

This happens because investors a wary of putting too much of their capital in stocks. Nobody knows what Trumps trade wars will lead to, so that's a significant risk factor for stocks.

Consequently, investors look for other places to put their money until the uncertainties gets cleared up. Preferably somewhere safe - meaning not necessarily in a bank as banks can fold. Danish real-estate bonds fits that: The Danish real-estate market is generally considered sound.

Furthermore, Denmark has a declared policy of closely following the Euro. The DKK has to be within a narrow band of 2.25% (IRRC) of the Euro. Having followed this policy ever since the EMS disbanded, investors generally trust this commitment.

Which means that until Trump cleans up the disturbance he has created, investors will flee stocks and look for safe bonds, to the extent that lenders/investors will actually pay for safe investments.

While attractive for lenders, it is a sign that something is very wrong with the economy. In a healthy climate money would flow to the stock market.

Can someone explain simply how they make money doing this?

Or how the institutional investors they mention make money?

Ill try.. danish morgages are based on bonds, just like government bonds, but realestate instaed. So the issuer just takes a small cut, dosent matter for them if rates are 10% or negatve 1%, (they take about 0,6%).

Now who buys the bonds then and “loose” money? Mostly institions, pensionfunds, corporations and normal investors. They take on theese investors, because they have to.. rates in banks are even lower (even more negativ), and deposits are only insured for about 100.000euro. These bonds, while negative, are more secure, and less negative.

Why don't they buy gold or some other asset that does not lose money like this?

People keep missing the rate. The effective annual rate of the loan is 2% because you don’t get the full amount payed out/ the principle is higher than the loaned amount.

This is effectively saying that someone is willing to loan you 1mil, and pay you negative interest on a loan of 1.1mil as long as you pay a fixed payback per month. So end of line you still payed more than you got, but every month instead of paying a bit more than your fixed payback, it’s slightly lower. Bank still makes money selling you the loan, investors still get more money back than they invest. Only thing noteworthy is that some of the math that used to be related to the fixed monthly positive interest is now covered by the upfront rate of getting the loan.

> investors still get more money back than they invest

No, they don’t. That’s the point. The reference rate is negative because the investors are buying bonds which will lose money.

They are buying at a conversion rate. So they buy for instance a 100k bond for 95k, since the the time is fixed and payments are forced, you end up guaranteed a 2.1% net interest even though the running interest on the principle from month to month is fixed.

It seems clear that the bond holders will not be getting any positive coupon and they are guaranteed to lose money. That's why this is in the news and we're talking about it.

As far as I understand the issuer cannot just sell the the bonds at 105% or whatever to account for the loss upfront with the price converging to 100% in 10 years (because these are callable bonds) and apparently they have some technical problems to implement negative coupons: "The negative callable bond is creating some technical difficulties. Jyske said it will initially be registered as a floating-rate bond until the systems of VP Securities, Denmark’s central securities depository, are adapted to handle negative coupons for fixed-rate bonds."


In case you think negative yields cannot happen, it is definitely possible. Many government and corporate bonds in Europe are trading at a price which is above the value of the nominal plus all the remaining coupons.

Germany has issued last month zero-coupon bonds which were sold above par and they are trading now at 106.87 euros (and the only thing you will get back if you hold them to maturity is 100 euros in 2029).


> they are guaranteed to lose money

To be fair, I imagine it could still happen that these bonds have zero or positive yield if they are bought at more than a 5% discount, but in that case why would the issuer bother offering negative coupons in the first place?

That actually isnt completely true.. Interest in Denmark are tax deductible, so + fees etc and after taxes, rates are effectively 0.58% to 1.51%.

This link shows loans available at my mortgage provider: https://netbank.totalkredit.dk/netbank/showStockExchange.do

The cost of storing gold isn't zero. If you have $100M of gold, you have to prevent serious organized criminals from stealing it. That can cost $500k/yr (ie, -0.5% return) for 3 shifts of security and a vault, cameras, insurance, etc.

Brinks will store it for you for 0.72%/yr. https://goldsilver.com/vault-storage/

Other assets lose money in other ways :-)

Or maybe not, but the risk exists. With a negative-yielding bond at least you know what you’re getting (as long as there is no default!).

The issuer, “realkredit” actually covers defaults, so the bonds are very secure.

Thanks, makes sense.

Well at least the explanation does, but the world is still crazy!

They borrow the money on money markets from people who will lose even more, and you get some of the upside as well.

Here's the actual bank source, in Danish: https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negati...

Danish mortgage bonds are effectively guaranteed by the Danish state and there are only a few actual government bonds in circulation. The interest rates go below 0 because investors don't trust banks with their money.

”The interest rates go below 0 because investors don't trust banks with their money.”

If investors didn’t trust banks, they would demand high interest rates when borrowing banks their money, just as they demand higher interest from those who want to make smaller down-payments on houses, or on credit card debts.

Looking at https://www.investing.com/rates-bonds/european-government-bo..., many European countries (even Spain and, short-term, Italy) can borrow money from the market at negative interest rates.

That must mean those borrowing them money must be confident they will get that money back (not that surprising, given that the ECB keeps printing money)

> Danish mortgage bonds are effectively guaranteed by the Danish state

I don't think that's true? Can you explain what you mean? It's probably true that a total collapse won't be tolerated, just like a total collapse of the banking sector wouldn't be tolerated.

Woo!! Give me one of those negative interest mortgages here in the US for my house - I’ll gladly pay some points for it.

What a world we live in.

The effective interest seems to be above 0% though. The linked FAQ shows calculations where the total amount paid back is more than the total loan amount. Plus some talk about some kind of exchange rate(?) seems like this could be even riskier than normal?

The “Exchange rate” is the kurs(Danish) when the loan is for instance at kurs95 that means you only get 95% of the loaned amount. Effectively the investor gets a bigger principal than was actually loaned. Depending on invester pressure the kurs goes up, but It’s typically close at 100, and a lower rate loan is then opened up, since investing in a kurs100+ loan means taking an emidiate hit on the principal owed, which is bad for investors even if interests pay back the gap over time.

And true, even with negative rate this loans kurs plus fixed costs still mean you are still paying the bank more than they are loaning you.

> Effectively the investor gets a bigger principal than was actually loaned.

This difference between the amount loaned and the amount paid back over the life of the loan is commonly referred to as "interest".

It really feels like they're just playing semantic games here. Any proper comparison of APRs would include both components. A true "negative interest rate mortgage" would be one where the bank pays you to borrow money, with the total amount borrowed being greater than the total amount paid back to the bank.

what does that mean for poor people, does someone know? Can someone explain?

Poor people are screwed up regardless -- if rates are high, they can't afford payments, if rates are low, prices rise and they still can't afford payments. Not to mention getting downpayment.

Workaround: don't be poor.

The down payment is the hardest part. "Just barely able to make payments" people are better off when rates are high because that depresses prices resulting in a lesser dollar amount for whatever the down-payment is.

I don't know how to be not poor :| applying for jobs but takes time to get one

Do rising prices spur the construction of more homes in Denmark?

Seems pretty steady:


2019 is not over yet, so maybe it's a little higher this year.

This is only for "parcelhuse", which wikipedia defines as: "Single-family detached home".

Homes come in a lot of shapes and sizes though - in Italy where I lived for a number of years, it's pretty common for people to live in a flat in a 4/6/8/whatever unit building, either as owners or renters.

Depending on where demand is, I'd expect more of that sort of thing too, if it's allowed. In the US, it is forbidden to build those kinds of homes in large areas of our cities.


Here is the graph for multistorey apartment buildings. I'm not smart enough to interpret what this means. In the big city I live in in Denmark, most new apartment buildings are luxury apartments and expensive as hell, so I don't think they are a result of rising house prices.

In general, new construction is expensive, but if you cut off that supply, people with money just bid up prices on older housing.

Looks like the graph kicked up in response to something... that's good, I guess.

For poor people it means that your rent continues to rise, house prices become further inflated and you will still pay massive interest rates if you get a consumer loan.

In Denmark the rents are not free market so they can't just rise with house prices.

What can they rise with? Some official inflation rate? Does the calculation of that inflation rate include house prices?

There is no rent control for buildings built after 1993.

There is not strict rent control but that does not mean that the landlord can increase the rent as he sees fit.

Poor people don't always have the means to save to afford the 10-30% down payment, so they cannot benefit from the cheap mortgage rates.

On the other hand, the banks are basically transferring wealth to the middle class (or anyone who can afford a mortgage) by paying them to borrow money.

In Denmark the required downpayment is 5%, up from 0 a few years ago.

Same in the US effectively. You will have to pay extra for mortgage insurance but I think the 20% notion is long dead.

House prices will remain artificially high so they won't be able to afford one.

this is pretty awesome. hopefully it spreads across europe

this isn't free money

It actually is.. any morgage below infation, is free money..

This loans effective cost is above inflation. Inflation is in the 1-2% range and this is net at 2.1% There’s no free money just flashy marketing.

It's not. Since home prices are linked to interest rates (prices go up/down depending on interest rate movements), all that's going to happen is that home prices will go even higher. In the end your monthly payments is going to be the same.

You really think a for-profit bank would give more than it takes?

The bank takes it's share in the form of fees. The negative rate is simply because the money market sees negative rates on the 5-10 year horizon. The bank simply passes the rate of the money market on to the consumer:

> 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.

Negative bond rates happen when there is a surplus of capital looking for "safe havens". Some investors are willing to pay to have money placed safely for a number of years. The Danish real-estate bonds are regarded as a very safe haven.

sure, there are set fees, which will be partially offset by the negative interest repayments

It is actually a sign that something is very wrong with the general economy.

Negative rates only happens when investors shy away from stocks and just want their money to be safe for the next 5-10 years. Investors are actually willing to pay just to have their money kept safely out of the stock market. What does that tell you?

There is so much volatility (read: Trump). Stocks can both go up and down with a tweet. Until the next day or 4 hours later. So investors flees stocks and look for safe bonds.

North European countries are a template of success. And this is just another example of it.

We need to see more of this so we can transfer wealth from the rich to the poor more effectively and get them to invest in the economy.

More money is loaned to the rich than is to the poor. So this is giving more money to the rich than it does to the poor.

Is that necessarily the case?

I as a home owner would be interested for a remortgage to stick in the stock market (or even a risk free investment). Not really a poor person option though.

This would presumably just inflate the/a housing bubble, which doesn't seem like it would inherently help poor people, you cant really liquidate the asset as you need to live in it. Second homes on the other hand....

Good luck getting a negative interest rate loan as a poor person

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