When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. This means that low interest rates are the main reason behind surging house prices and is why people have to spend decades paying back loans and being vulnerable to a drop in house prices. It creates too much debt in society and generally makes the economy more fragile than it has to be. The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth to house owners from people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. This must end if we want to avoid a repeat of the 2008 crisis. But with the current levels of government debt, it's hard to see a political solution.
Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.
Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.
I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.
I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...
Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
> When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.
Yep exactly.
The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.
It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
> people have to spend decades paying back loans and being vulnerable to a drop in house prices
So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
>When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.
That is how borrowing works. Otherwise the lender would not make a profit.
>It creates too much debt in society and generally makes the economy more fragile than it has to be.
and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.
Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
In Denmark, we have introduced regulation that limits buyers to only be able to borrow 4 times their yearly household income, when buying a house in the largest cities. That puts a limit on how much the house prices can rise.
The situation is, on one side, concentrations of wealth that are too large to invest in anything that captures a positive return; and on the other side, an endless list of things that desperately need investment but cannot capture returns to the individual investor, such as decarbonisation and healthcare.
Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
That's really only the case when you have regulation limiting supply growth upwards, and/or limited amounts of land you can sprawl outwords. I grew up in chicago and we love to build high rises (chicago engineers were the ones that designed the Burj Khalifa to give you an example of our love for architecture), and we have hundreds of miles of farmland we can sprawl out to forever increasing supply of homes.
The special thing about housing though is you have to pay monthly payments for housing. This is the reason why those monthly payments are privileged in consideration.
So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.
The transfer of wealth in the housing market happens from one group to another regardless.
I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.
> In August, Jyske became the first to offer a negative rate on a home loan, in effect paying customers 0.5% to borrow money for 10 years.
Surely this can't end well?
Here in Sweden the house prices are so high in cities it's almost impossible for young people to get a house, sometimes even an apartment. We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
> We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
As someone who moved to London far too long ago and has expected some miraculous drop in house prices every time the economy catches a sniffle - stop waiting. It'll never happen. I mean, it may do, but to all practical degrees, house prices will creep upwards forever.
There's no 'right time' to get on the ladder, other than when you can actually afford.
Now all I hope is that I get out of London before I get too bitter about not having simply bit the bullet a decade or so ago.
Call me cynical but I believe that this will not happen since the people in power are going to get hurt by such a correction. They will try their damned best to prevent it happening. The Swedish central bank (Riksbanken) has also stated as much, and the current policy is very much based on this.
Prices have been stagnant for some time now, and tighter restrictions on new loans hopefully reduces the number of people that would be under water if prices dropped 15 or 25%. It would have a pretty bad effect on the economy as a whole though. I’d manage, but would stop spending for years.
On the one hand this sounds eminently stupid. On the other hand, it means there is some sort of de-linking of money and time.
Negative interest rates roughly imply that Denmark crowns have no ability to preserve wealth over time. If anyone gets paid in crowns they should attempt to spend them immediately and buy something durable.
It is hard to see how this is an improvement over letting money hold value over time. Now there will be more competition over scarce real resources instead of wealthy savers holding a "fake resource" of cash in a bank account. And anyone who doesn't understand interest rates might lost out from confusion.
Negative interest rates indicate deflation. In deflation, cash is king - people are willing to hold cash rather than make investments or buy stuff. This generally reduces economic activity and also makes it difficult for governments to stimulate by reducing rates.
(In an inflationary environment, the wise thing is to put your cash into hard assets, since it will be worth less in the future. Deflation in the opposite.)
Other than spreading it around multiple banks, the natural outcome of this will be increased investment, most likely in real estate at one end of the spectrum and on the other things like money market funds, treasury bonds, and to a lesser extent index tracker style ETFs.
If the trend spreads across other countries, and if you believe this is a trend that is hard to revert (falling interest rates), I'd say we're in for a few more years of the stock market climbing with bigger and bigger valuations at crazier revenue multiples. Even though lately it seems like everyone is predicting that a crash is right around the corner, I don't think it's likely without a big external event happening to disturb this trend. Either some cyber / regular war or some other event nobody is forseeing.
The 2008 big short dude recently predicted that the inflows of money into ETFs by a lot of very passive investors is gonna create a situation where big valuations are based on nothing other than people not having any other place to put their savings, but I think like in 2008, his prediction is very early again.
It strikes me that with an absurdly low debt-to-gdp ratio of 34% and negative interest rates maybe the Danish government should invest more money in their economy. Maybe leverage the market to build the enormous amount of green infrastructure they and the world needs, the returns don't need to be that high to pay off.
Soon enough we may find out that too much is invested into the expectation that interest rates will go down indefinitely.
When inflation finally strikes, there will be no tools left to fight it. Getting deeply into debt and buying as many assets as you can would then be the right thing to do.
Isn't the primary tool to fight inflation with an increase in interest rates? And if interest rates are negative doesn't that mean that there is lots of room to adjust them?
It strikes me that the problem is that the tools to fight deflation are inadequate.
How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
This is a really bad articles. The short term rates are not driving this. They don't drive long term rates because be short term rates are largely driven by technical considerations (eg the recent fed interventions in the overnight markets because of liquidity issues).
I spoke to someone about this a while ago. These loans are often required by the government to message certain targets, and are meet positive for the banks because of other regulatory issues that may exist. These negative rates home loans wouldn't exist without some regulation various regulation and government incentives.
In a world with crypto currencies, would a frugal Dane be wise to put their cash into a cryptocurrency?
I realize crypto is still seen as risky, however if it takes hold and overall market volatility stabilizes, how would easy access to borderless liquid digital assets affect the neg interest rate strategy?
Edit: remove mention of specific cryptocurrency in an attempt to shift focus to broader strategy.
What is the advantage to buying Tether with Krones instead of just converting them to USD? I think people jump to crypto as a solution when oftentimes the financial markets have already had the same solution for hundreds of years (in this case, foreign exchange).
With Tether you're essentially converting your cash into USD, but with massive risk added on top. Tether is, as stated by themselves, already not backed one-to-one by USD and you cannot actually redeem them, only trade them in exchanges.
What you instead should ask what effect real cryptocurrencies like Bitcoin can have.
I'm personally quite positive to cryptocurrencies, but I don't have a crystal ball. If a single country is about to go under of course it's a good alternative, but of the global economy tanks it's all up in the air.
[+] [-] sword_smith|6 years ago|reply
[+] [-] bboygravity|6 years ago|reply
Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.
Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.
I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.
I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...
Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
[+] [-] nickjj|6 years ago|reply
Yep exactly.
The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.
It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
[+] [-] WillPostForFood|6 years ago|reply
So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
[+] [-] paulpauper|6 years ago|reply
That is how borrowing works. Otherwise the lender would not make a profit.
>It creates too much debt in society and generally makes the economy more fragile than it has to be.
and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.
Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
[+] [-] dybber|6 years ago|reply
[+] [-] pjc50|6 years ago|reply
Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
[+] [-] mrep|6 years ago|reply
[+] [-] viburnum|6 years ago|reply
[+] [-] parasight|6 years ago|reply
[+] [-] gyuserbti|6 years ago|reply
So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.
The transfer of wealth in the housing market happens from one group to another regardless.
I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.
[+] [-] the8472|6 years ago|reply
And there are no financial constructs to spread the risk?
[+] [-] lawn|6 years ago|reply
Surely this can't end well?
Here in Sweden the house prices are so high in cities it's almost impossible for young people to get a house, sometimes even an apartment. We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
[+] [-] detritus|6 years ago|reply
As someone who moved to London far too long ago and has expected some miraculous drop in house prices every time the economy catches a sniffle - stop waiting. It'll never happen. I mean, it may do, but to all practical degrees, house prices will creep upwards forever.
There's no 'right time' to get on the ladder, other than when you can actually afford.
Now all I hope is that I get out of London before I get too bitter about not having simply bit the bullet a decade or so ago.
[+] [-] toxik|6 years ago|reply
[+] [-] alkonaut|6 years ago|reply
[+] [-] roenxi|6 years ago|reply
Negative interest rates roughly imply that Denmark crowns have no ability to preserve wealth over time. If anyone gets paid in crowns they should attempt to spend them immediately and buy something durable.
It is hard to see how this is an improvement over letting money hold value over time. Now there will be more competition over scarce real resources instead of wealthy savers holding a "fake resource" of cash in a bank account. And anyone who doesn't understand interest rates might lost out from confusion.
[+] [-] wrycoder|6 years ago|reply
(In an inflationary environment, the wise thing is to put your cash into hard assets, since it will be worth less in the future. Deflation in the opposite.)
[+] [-] nabla9|6 years ago|reply
Inflation in Denmark august 2019 - july 2019 was -0.39%. That is, the value of money is increasing.
[+] [-] flerchin|6 years ago|reply
[+] [-] vasco|6 years ago|reply
If the trend spreads across other countries, and if you believe this is a trend that is hard to revert (falling interest rates), I'd say we're in for a few more years of the stock market climbing with bigger and bigger valuations at crazier revenue multiples. Even though lately it seems like everyone is predicting that a crash is right around the corner, I don't think it's likely without a big external event happening to disturb this trend. Either some cyber / regular war or some other event nobody is forseeing.
The 2008 big short dude recently predicted that the inflows of money into ETFs by a lot of very passive investors is gonna create a situation where big valuations are based on nothing other than people not having any other place to put their savings, but I think like in 2008, his prediction is very early again.
We'll see, interesting times ahead.
[+] [-] JamisonM|6 years ago|reply
[+] [-] dev_dull|6 years ago|reply
[+] [-] gridlockd|6 years ago|reply
When inflation finally strikes, there will be no tools left to fight it. Getting deeply into debt and buying as many assets as you can would then be the right thing to do.
Obviously, this is not financial advice.
[+] [-] JamisonM|6 years ago|reply
It strikes me that the problem is that the tools to fight deflation are inadequate.
How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
[+] [-] pmontra|6 years ago|reply
2% inflation and 1% interest rate on savings is the same as 0% inflation and -1% interest rate.
Even getting a -1% mortgage creates inflation, because who sells houses can ask somewhat higher prices and buyers will be able to pay them.
[+] [-] jnordwick|6 years ago|reply
I spoke to someone about this a while ago. These loans are often required by the government to message certain targets, and are meet positive for the banks because of other regulatory issues that may exist. These negative rates home loans wouldn't exist without some regulation various regulation and government incentives.
[+] [-] pcurve|6 years ago|reply
[+] [-] benj111|6 years ago|reply
Either way, I was unsure which way rates had moved just from reading the title.
[+] [-] levthedev|6 years ago|reply
[+] [-] annamargot|6 years ago|reply
I realize crypto is still seen as risky, however if it takes hold and overall market volatility stabilizes, how would easy access to borderless liquid digital assets affect the neg interest rate strategy?
Edit: remove mention of specific cryptocurrency in an attempt to shift focus to broader strategy.
[+] [-] levthedev|6 years ago|reply
[+] [-] lawn|6 years ago|reply
What you instead should ask what effect real cryptocurrencies like Bitcoin can have.
I'm personally quite positive to cryptocurrencies, but I don't have a crystal ball. If a single country is about to go under of course it's a good alternative, but of the global economy tanks it's all up in the air.
[+] [-] klauslovgreen|6 years ago|reply
[+] [-] badlogic|6 years ago|reply