My friends in Geneva tell me that this has been a thing there for a long time. It has some pretty bizarre effects on the market (according to my friends):
1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
3. Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more.
I would be interested to hear from people with more direct experience on how this plays out.
Well, I can't talk about Geneva or Zurich because both cities are very expensive. But generally, prices are going up, the down payment is normally 20% of the price. This is one problem, another one is how they calculate the risk. The "law" is you have to be able to pay the mortgage at 5% and that 5% cannot be more than 1/3 of your income.
So if you buy a 1.25m house and take a 1m mortgage 5% is of that is 50k, so your salary has to be 150k.
Point 3) is wrong, they make still a lot of money with loans, a lot of people still take 10 year loans for somewhere between 0.6% and 1%.
This has been the case in Australia for decades now. Average house price is AUD$1M. Standard deposit is 20%.
Government has just allowed first home buyers to get a mortgage on a 5% deposit. While that sounds great, it's obviously just encouraging more debt to flood the market and drive up prices.
And of course the government doesn't give a shit about housing affordability. The standard practice here is to get at least two mortgages: one for the house you want to live in, and one for an investment property that you'll eventually sell to pay off your other mortgage.
Sounds stupid right? Well, not when the government gives massive tax benefit handouts to property investors:
1. 50% capital gains tax discount.
2. Negative gearing: basically the losses on your investment property can be claimed as a tax offset against your other income.
> 1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.
Another potential consequence is that if the price of your house falls more than the down payment you invested, you may be incentivized to simply walk away.
The price could fall for any number of reasons: a market crash and country-wide depression widely impacting many people, or an individual owner who simply did no maintenance/upkeep over a period of years and the property is in disrepair. The disrepair scenario is common among elderly homeowners in the US.
>Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more
Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) .
This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets.
Banks usually don't keep the loans. They are sold off quickly for a higher profit.
> 2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
Isn't this what is happening right now in the US, that the down-payment is one of the barriers, since less than 10% (forget 20%) down has huge penalties long-term?
> My friends in Geneva tell me that this has been a thing there for a long time. It has some pretty bizarre effects on the market (according to my friends):
One important difference between Geneva and Denmark though - Genevas extremely expensive housing market (in both purchase and rent prices) is driven by its geographical location. It's surrounded by mountains on most sides and sitting on a lake. This means there's pretty much no space to build more buildings to accommodate the influx of people moving there to work in science and politics.
Geneva building prices were skyrocketing without those loans just because there was no way to build more.
Typically speaking home prices tend to fluctuate based on interest rates, because home buyers actually purchase based on what they can afford on a monthly basis, not what the actual list price of the house is. I imagine at such low rates, the effect must be pretty strong though.
Dane here. A piece is missing. Interest rates may be 0%, but there is also an annual bank fee on the loans. As the interest rates have gone down, these fees have risen, and I believe the banks increasingly make their money on those. It's still good news for borrower, since the fees don't accrue interest.
You probably have a term "Effective interest rate" which takes into account various fees and interest rate. It was designed to counter this type of practices by banks where they would offer lower interest rate but higher fees which were less visible to the consumer.
There is a more basic economic question that I am curious about.
I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.
The reason I think is that interest/mortgage/etc rates just reflect how much people/banks/etc are willing to receive in profit for parking or lending their money somewhere. This has gone to 0% (almost no profit) because no one can offer good returns on the money. Or the people receiving the money have so many choices that the lenders are forced to compete to 0%. All the VC money sloshing around for free is because there is no more favorable place for that money to find profit and the 1-in-10 (?) shot that startups have is still better odds than average other opportunities.
Right now it seems there is too much money searching for returns. And that money is not somehow just going to disappear over time.
To take the opposite hypothetical, if you consider the accumulated wealth of all countries now, and the relatively low growth of most of them, how could it be possible that all that money could find good investment return rates? Except for isolated pockets of growth, need for investment, where will we find broad returns anything greater than a few %?
So, until something fundamental about the money supply changes, are we in for a long period of pretty much 0% returns?
I would love to know some more sophisticated ways to understand the situation.
But one forgets that even though the interest rate is 0% the COST of the loan is !=0, we still have to pay a "bidragsssats" which is an "administrative fee" to have the loan
The interesting part is that that this rate can be changed over time to whatever the lone-shark wants it to be, thus - as always - you need to look at the TCO.
ÅOP as it is in danish: "Årlig Omkostning i Procent" - aka the Yearly cost in percent...
When interest rates are as low as they have been now for a long while (sub 2% for homes), the interest rate portion isn’t the limiting factor for how much you can afford to borrow.
Instead, to prevent prices going to infinity, there is usually some kind of laws in place for maximum length such as 30, 50 or 100 years (infinite I.e interest-only was common at least in Sweden when rates were higher), a minimum down payment such as 15%, a maximum size of the mortgage relative to the income etc.
Sweden now has all of these (!) so for most buyers, whether the interest is 0.5 or 3.5 makes very little difference. Most buyers, especially first time buyers, will be capped by one of the other limits regardless.
As it has been pointed out, this loan isn’t 0% since it’s not the effective interest rate including fees that is 0%.
In NL, some banks issued mortgages with interest percentages linked to Euribor interest rates (like +0.5% on 3-month Euribor rate). Once the Euribor dropped below -0.5%, the banks actually had to pay out the interest difference (if there weren’t other bank charges added)... Some people, but likely to be just hundreds of customers, not much more, actually have a mortgage (with ING and Rabobank) for which they receive money at this moment.
The same mortgage product cannot be bought anymore...
> Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs.
This is like a Canadian getting a 3.0% loan in USD to buy a house, then having the Canadian government fix the Canadian dollar such that it appreciate 3.0% pa against the USD. It's effectively a 0% loan, but due to obscure technicalities.
It seems, the lender still earns interest, it's just that the interest is covered by the variance in exchange rates between currencies. So your DKK1000 mortgage payment is worth €1030 after the first year, €1091 the next, etc.
The key term here is Danes, not residents of Denmark, but individuals who are born or naturalized Danes, even many of the naturalized ones do not get the same rates. By default Danes get ~5% downpayment where none Danes get ~40%.... yay
I went through 3 refinances last year (also in CA) all at little to no closing costs for a 30 year fixed (4.00% → 3.25% → 2.5%). The math made sense every single time when factoring in the lower monthly payments and negligible closing costs.
At this point I don't know what the point of the loan is anymore. Is there really any realistic intention to ever pay it off? Every single time I thought I had timed the bottom, but rates continue to drop.
Would you mind disclosing which lender you went with to get 2.0%? Are you paying points? I'm using Better.com for a refi in CA also but the "best" I can get is 2.625% with 0.053% ($330) in closing costs. They don't even list 2.0%
Edit: Better.com is actually listing 2.0% rates but with $9,100 in points, based on my property and location in CA.
Before the financial crisis of 2008 you could get those in the UK. I had one just as the fan got hit by something back then. 25 years, 0%, no deposit. They were quite common. It was so good I didn't remortgage for 10 years until we sold and moved.
Here in the UK some people had mortgages that were "x% below base rate". When the 2008 crash happened, rares fell to 0 or 0.25% and they were paid by their lender for the privilege of having borrowed.
Bought an apartment in Germany this year. My effective interest rate is 0.74% fixed 20 years with a downpayment of 40%. The bank guy said the bank will make no money on this loan. They do it anyway because they want the object in the portfolio.
Inflation in the housing market has been tremendous in the last years in germany.
> The bank guy said the bank will make no money on this loan.
Ha, I believe that the guy told you that, I don't believe he is correct. :) The bank is not a non-profit and is totally making money on that mortgage. A considerable margin in fact, given how much effort goes into it.
The article does not say anything about the price of the bonds. So it is kind of useless information. For example if it is 0.94 it may be worse than a 0.5 coupon bond with a higher price.
I have -0.28% on a mortgage which will be refinanced every 5 year. The lenders actually pay me to store their capital. Weird times.
In actuality, though, I also pay a 0.5% "contribution" fee which covers mortgage company administration and collective risk. So the effective rate is around 0.22%.
For the 20y bonds the 0% interest is also just the actual bond rate. The administration fee will have to be added.
The "contribution" fee rate depends on how much of the home value has been mortgaged. Below 60% it is typically around 0.5% because of the relatively low risk (you can probably always auction off the house at get at least 60% even in bad times). When mortgaged from 60 to 80% of the home value the fee is higher.
At the end of the day isn't this just a regressive tax in favor of land owners? How many compounding cycles would it take before no one cares about a wipe out in land valuation as it's primarily owned by the extremely wealthy.
The interest rate on my mortgage is MAX(12 months Euribor rate, 0%) + 0.5%. Apparently some banks didn't realise to do the MAX() back in the day because surely the Euribor rates are not going to be negative, so there were some instances of negative mortgage rates here.
[+] [-] ageitgey|5 years ago|reply
1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
3. Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more.
I would be interested to hear from people with more direct experience on how this plays out.
[+] [-] patatino|5 years ago|reply
So if you buy a 1.25m house and take a 1m mortgage 5% is of that is 50k, so your salary has to be 150k.
Point 3) is wrong, they make still a lot of money with loans, a lot of people still take 10 year loans for somewhere between 0.6% and 1%.
[+] [-] treelovinhippie|5 years ago|reply
Government has just allowed first home buyers to get a mortgage on a 5% deposit. While that sounds great, it's obviously just encouraging more debt to flood the market and drive up prices.
And of course the government doesn't give a shit about housing affordability. The standard practice here is to get at least two mortgages: one for the house you want to live in, and one for an investment property that you'll eventually sell to pay off your other mortgage.
Sounds stupid right? Well, not when the government gives massive tax benefit handouts to property investors:
1. 50% capital gains tax discount.
2. Negative gearing: basically the losses on your investment property can be claimed as a tax offset against your other income.
[1] https://en.wikipedia.org/wiki/Capital_gains_tax_in_Australia
[2] https://en.wikipedia.org/wiki/Negative_gearing_in_Australia
[+] [-] matwood|5 years ago|reply
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.
[+] [-] nugget|5 years ago|reply
The price could fall for any number of reasons: a market crash and country-wide depression widely impacting many people, or an individual owner who simply did no maintenance/upkeep over a period of years and the property is in disrepair. The disrepair scenario is common among elderly homeowners in the US.
[+] [-] ganeshkrishnan|5 years ago|reply
Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) .
This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets.
Banks usually don't keep the loans. They are sold off quickly for a higher profit.
[+] [-] SoSoRoCoCo|5 years ago|reply
Isn't this what is happening right now in the US, that the down-payment is one of the barriers, since less than 10% (forget 20%) down has huge penalties long-term?
[+] [-] izacus|5 years ago|reply
One important difference between Geneva and Denmark though - Genevas extremely expensive housing market (in both purchase and rent prices) is driven by its geographical location. It's surrounded by mountains on most sides and sitting on a lake. This means there's pretty much no space to build more buildings to accommodate the influx of people moving there to work in science and politics.
Geneva building prices were skyrocketing without those loans just because there was no way to build more.
[+] [-] qppo|5 years ago|reply
[+] [-] ashtonkem|5 years ago|reply
[+] [-] oblio|5 years ago|reply
[+] [-] PoachedSausage|5 years ago|reply
Where Real part is down payment and Imaginary part is land price?
Seriously though, this has been the situation in the UK for a long time. Today the down payment is equivalent to price of the house in the 1970's.
[+] [-] fifticon|5 years ago|reply
[+] [-] saberdancer|5 years ago|reply
[+] [-] tsjq|5 years ago|reply
[+] [-] supernova87a|5 years ago|reply
I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.
The reason I think is that interest/mortgage/etc rates just reflect how much people/banks/etc are willing to receive in profit for parking or lending their money somewhere. This has gone to 0% (almost no profit) because no one can offer good returns on the money. Or the people receiving the money have so many choices that the lenders are forced to compete to 0%. All the VC money sloshing around for free is because there is no more favorable place for that money to find profit and the 1-in-10 (?) shot that startups have is still better odds than average other opportunities.
Right now it seems there is too much money searching for returns. And that money is not somehow just going to disappear over time.
To take the opposite hypothetical, if you consider the accumulated wealth of all countries now, and the relatively low growth of most of them, how could it be possible that all that money could find good investment return rates? Except for isolated pockets of growth, need for investment, where will we find broad returns anything greater than a few %?
So, until something fundamental about the money supply changes, are we in for a long period of pretty much 0% returns?
I would love to know some more sophisticated ways to understand the situation.
[+] [-] tveyben|5 years ago|reply
The interesting part is that that this rate can be changed over time to whatever the lone-shark wants it to be, thus - as always - you need to look at the TCO.
ÅOP as it is in danish: "Årlig Omkostning i Procent" - aka the Yearly cost in percent...
[+] [-] alkonaut|5 years ago|reply
Instead, to prevent prices going to infinity, there is usually some kind of laws in place for maximum length such as 30, 50 or 100 years (infinite I.e interest-only was common at least in Sweden when rates were higher), a minimum down payment such as 15%, a maximum size of the mortgage relative to the income etc.
Sweden now has all of these (!) so for most buyers, whether the interest is 0.5 or 3.5 makes very little difference. Most buyers, especially first time buyers, will be capped by one of the other limits regardless.
As it has been pointed out, this loan isn’t 0% since it’s not the effective interest rate including fees that is 0%.
[+] [-] jschulenklopper|5 years ago|reply
The same mortgage product cannot be bought anymore...
[+] [-] GreeniFi|5 years ago|reply
Surely it’s more profitable to do nothing?
[+] [-] mywittyname|5 years ago|reply
This is like a Canadian getting a 3.0% loan in USD to buy a house, then having the Canadian government fix the Canadian dollar such that it appreciate 3.0% pa against the USD. It's effectively a 0% loan, but due to obscure technicalities.
It seems, the lender still earns interest, it's just that the interest is covered by the variance in exchange rates between currencies. So your DKK1000 mortgage payment is worth €1030 after the first year, €1091 the next, etc.
[+] [-] vachi|5 years ago|reply
[+] [-] andrewmcwatters|5 years ago|reply
[+] [-] DevKoala|5 years ago|reply
[+] [-] acwan93|5 years ago|reply
At this point I don't know what the point of the loan is anymore. Is there really any realistic intention to ever pay it off? Every single time I thought I had timed the bottom, but rates continue to drop.
[+] [-] hbcondo714|5 years ago|reply
Edit: Better.com is actually listing 2.0% rates but with $9,100 in points, based on my property and location in CA.
[+] [-] justinzollars|5 years ago|reply
[+] [-] Hamuko|5 years ago|reply
[+] [-] scotcha1|5 years ago|reply
[+] [-] covid21|5 years ago|reply
[+] [-] harel|5 years ago|reply
[+] [-] LatteLazy|5 years ago|reply
[+] [-] volkerp|5 years ago|reply
[+] [-] 317070|5 years ago|reply
Ha, I believe that the guy told you that, I don't believe he is correct. :) The bank is not a non-profit and is totally making money on that mortgage. A considerable margin in fact, given how much effort goes into it.
[+] [-] mensetmanusman|5 years ago|reply
[+] [-] danhak|5 years ago|reply
[+] [-] seiferteric|5 years ago|reply
[+] [-] andromeduck|5 years ago|reply
[+] [-] imtringued|5 years ago|reply
[+] [-] barbarbar|5 years ago|reply
[+] [-] renewiltord|5 years ago|reply
[+] [-] tempsy|5 years ago|reply
[+] [-] arnon|5 years ago|reply
https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-y...
[+] [-] useerup|5 years ago|reply
In actuality, though, I also pay a 0.5% "contribution" fee which covers mortgage company administration and collective risk. So the effective rate is around 0.22%.
For the 20y bonds the 0% interest is also just the actual bond rate. The administration fee will have to be added.
The "contribution" fee rate depends on how much of the home value has been mortgaged. Below 60% it is typically around 0.5% because of the relatively low risk (you can probably always auction off the house at get at least 60% even in bad times). When mortgaged from 60 to 80% of the home value the fee is higher.
[+] [-] lumost|5 years ago|reply
[+] [-] Hamuko|5 years ago|reply
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