What happens when mortgage interest-rates fall to 0%?

by Shaun Richards

A feature of the credit crunch era has been the way that in the end monetary policy has come down to two things. Pumping up the housing market and house prices in particular ( The Wealth Effects! The Wealth Effects!) and more recently financing government borrowing. Both conveniently support The Precious via the way that asset prices are driven higher in this instance house and bond prices. There has been news on that front this week from Denmark.

The country with the longest history of negative central bank rates is offering homeowners 20-year loans at a fixed interest rate of zero.

Customers at the Danish home-finance unit of Nordea Bank Abp can, as of Tuesday, get the mortgages, which will carry a lower coupon than benchmark U.S. 10-year Treasuries. ( Bloomberg)

For newer readers who may be wondering why Denmark? Well Bloomberg gets to that as well.

Denmark stands out in a global context as the country to have lived with negative central bank rates longer than any other. 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.

So in the round we return to part of yesterday’s theme as the monetary push from the European Central Bank is the same as a super massive black hole which via the pegged exchange rate sucks Denmark along with it. This led it down an odd road back last March.

Effective from 20 March 2020, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.15 percentage point. The monetary policy spread to the euro area is thereby narrowed from -0.25 to -0.10 percentage points, remaining lower than the rate in the euro area. In the context of Denmark’s fixed exchange rate policy, the interest rate increase follows Danmarks Nationalbank’s sale of foreign exchange in the market. ( Nationalbanken)

The increase to -0.6% came about because of pressure on the Kroner.

 it was caused by Danish institutional investors selling kroner in response to a decline in the value of their foreign
assets.

There is now something of a swerve because in the past an increase in the official interest-rate would raise mortgage rates but as central banks learnt early in the credit crunch the world was spun on its axis a bit.

Homeowners have increased their fixed-rate mortgage loans significantly in recent years. During the
last 12 months, new fixed-rate mortgage loans of kr.
134.7 billion have been disbursed.

That was from the Nationalbanken at the end of last September and there is more below.

More than half of the Danish homeowners’ total
mortgage loans of kr. 1,712 billion is now again with
a fixed interest rate, more precisely kr. 856.6 billion.
The last time fixed-rate loans accounted for more
than half of the loans, was in 2009. The lowest level
was in 2012 with just 31.5 per cent.

So we see that the interest-rate cut into the icy world of negative rates back in 2012 probably had an impact because of the predominance of variable rates back then, but now for the reason below fixed-rates have become more popular.

The appetite for fixed-rate loans has increased in line
with the declining interest rate, differentiated administration fees, and the narrowed gap to the variable
interest rate.

The actual market

If we go to Finance Denmark we see that whilst interest-rates have been trending lower there is still quite a gap between short and long ones. For example the short bond mortgage rate is -0.55% and the long bond mortgage rate is 0.94%. But the gap has been narrowing as the long bond rate was over 3% in 2015 whereas the short one went negative then.

What about mortgage borrowing?

This has done this according to the Nationalbanken.

The Danes’ total mortgage debt has grown by 4.0
per cent in the past year, and the debt has increased
in 91 of 98 municipalities. The largest lending growth
is in Glostrup with 7.3 per cent.

The borrowing rise in new terms will be higher because some have chosen to repay more.

In the last four quarters, households have increased
the repayments on their mortgage loans by kr. 998
on average per borrowed million……..The Danes have repaid kr. 6.0 billion on fixed-rate loans in 3rd quarter 2020, while the repayments on variable-rate loans were kr. 4.4 billion……… They have so far repaid kr. 30.8 billion in
2020.

So as so often we see two different behaviours. Some are borrowing more but others are using this as an opportunity to repay. So greed and fear are co-existing.

House Prices

The official data gives us a clue but not a lot more. The latest reading is for the second quarter of last year and it was rising ever since it was set at 100 in 2015 to 120.4.We can set another benchmark I guess as the index had fallen to 85.7 as 2012 began and Denmark prepared for negative interest-rates.

There is a monthly price index for single family houses which showed at annual rate of increase of 4.6% in September which is quite a rise from the -0.2% of March as the pandemic hit.

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As to the overall situation prices are now much higher than September 2016 when the central bank announced this.

COPENHAGEN (Reuters) – A housing bubble is looming in Copenhagen, inflated by Denmark’s record-low interest rates, the central bank said on Wednesday.

Comment

There are other issues here and those of you with a sense of deja vu may be thinking of June 14th 2016.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

That is when we on here first covered negative mortgage rates in Denmark. Or maybe you are thinking of August 2019 and this?

In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time

Actually I noted this back then.

Since then things have taken a further step as Nordea has started offering some mortgage bonds for twenty years at 0%,

So we can say that whilst we need care as there are often admin fees on mortgages which mean the headlines are misleading that 0% mortgage rates lead to higher house prices. They are also associated with more debt.

However, over the past four decades,
debt has increased significantly faster than incomes
and today accounts for 260 per cent of the disposable
income of Danish households ( Nationalbanken)

Whilst some are repaying as we observed earlier others seem much less keen.

At the end of 3rd
quarter of 2020, 59.8 per cent of the variable-rate
loans are, however, interests-only.

Also they borrow for a long time in the mortgage market.

Long remaining maturity is a particular characteristic
on Danes’ mortgage debt. At the end of the 3rd
quarter of 2020, the remaining maturity of 59.9 per
cent of all Danes’ mortgage debt was between 25
and 30 years. Approximately half of the outstanding
debt is in the form of 30-year loans disbursed within
the past year, either as new loans or as refinancing
of existing loans to new loans with 30-year maturities. ( Nationalbankem)

I remember another country which went down that road as we mull whether Denmark is catching the vapors.

I’m turning Japanese
I think I’m turning Japanese
I really think so

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