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This Is What Happens After Three Years Of Negative Interest Rates
It may seem extraordinary that in the aftermath of the infamous Kocherlakota "dots" the Fed is actively contemplating negative interest rates, but some may have forgotten that Europe has had NIRP since last June. In fact, the reason for today's global risk-on rally, was Draghi's hint - remember: Draghi did absolutely nothing, just suggested he may do more - that in addition to extending the ECB's QE program, the ECB may cut its deposit rate, already at -0.20%, to -0.30% or more.
But when it comes to negative rates, the ECB is merely a late adopter. For the real pioneer one has to look further north in Denmark, where the central bank first adopted negative rates in the middle of 2012 to defend the krone's peg to the Euro. And, as documented here before, Denmark cut rates not once, not twice, but three times in early 2015 in anticipation of the EUR collapse, pushing its interest rate to a record negative -0.75%.
Denmark's descent into NIRPdom is shown in the Bloomberg chart below.
So what happens after 3 years of NIRP?
Well, according to Bloomberg, you get the mother of all housing bubbles, one which makes even China blush:
"Property prices in Copenhagen have risen 40-60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro."
This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses as we explained in January in "In Denmark You Are Now Paid To Take Out A Mortgage", so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.
What is disturbing is that Denmark is reflating a gargantuan housing bubble less than 7 years since its last housing bubble popped:
Denmark’s most recent housing bubble burst in 2008, with the subsequent price slide rivaling that seen in the U.S. subprime crisis. Thanks to generous welfare benefits, Danish households suffered only negligible foreclosure rates, unlike their U.S. counterparts.
Some are starting to warn that the central bank's primary strategy at keep the currency at bay is backfiring:
The Danish regulator this month warned Danske Bank against pursuing a growth strategy in Sweden as the housing market there shows signs of imbalances. Price developments are now “highly distressing,” Klas Danielsson, the chief executive officer of Sweden’s state mortgage bank, SBAB, said on Thursday.
He is not alone: "Denmark’s biggest mortgage bank says there’s a “real risk” Copenhagen is heading into a property bubble." Though a collapse isn’t imminent, “the danger signals” mean that apartment prices in the Scandinavian city “could reach an unsustainable level relatively fast should the current pace of price gains continue,” said Joachim Borg Kristensen, a housing economist at Nykredit.
Yes, after a 60% increase in 3 years, that is a safe assessment.
However, following today's tumble in the EUR, it is even safer to assume that Danish rates are about to go even more negative as the central bank scramble to defend its currency from even hotter money, and even more inflation. It also means that home prices are going to soar even more.
“Given the current prospects of urbanization, as well as the outlook for the economy and interest rates, housing prices look set to continue rising,” Kristensen said. But that will probably happen at a “slower pace than has been the case thus far.”
No, it won't: PFA, Denmark’s biggest commercial pension fund, said on Thursday it will invest as much as 4 billion kroner ($607 million) in the country’s property market. It plans to treat the investment much like its bond portfolio, according to an e-mailed note. PFA is returning to the market after selling most of its property portfolio in 2006.
We may not have economic tenure at Harvard but even we know what will happen to property prices in this scenario.
And while the US may have had problems reflating its own housing bubble, Denmark has already achieved just that:
“The hefty growth in both prices and sales of building projects is a worry because it could be driven by an anticipation of continued housing price gains,” Kristensen said. “The question is whether potential home buyers have exaggerated expectations when it comes to future price developments.”
Finally, while we have no doubts how this latest housing bubble will end (in tears, for those wondering), one thing we find truly entertaining is Denmark's inflation rate: as the following chart shows, the officially reported inflation in the northern European nation is a whopping... 0.5%
So let's get this straight: Copenhagen home prices rising at 12% per year (or more) and yet the Danish central bank is operating on the assumption that headline inflation is half of 1%?
In retrospect, is it any wonder that when using such clearly ridiculous "data" on which to base decisions that have taken us beyond the zero-bound and into the Twilight Zone of monetary policy, that the world is now living inside the biggest asset bubble ever inflated...
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As explained here, just as low interest rates result in asset bubbles, negative rates will result in super bubbles, particularly if they are pushed significantly negative only possible by banning cash. Of course like all bubbles these negative rate super bubbles will crash, just from a higher level.
Central Planning usually creates scarcity, oversupply, under and overcapacity, and mismatches in kind and quality...and it does so with great reliability.
But everyone is always telling me that Nordic socialism is light and sweet and fluffy, not dark and brutal like the Soviet kind.
Housing is historically a dead asset. You only get long-term appreciation in housing when the government is fucking around with the currency. Adjusted for inflation, housing is essentially a flat asset.
If you own some land on the other hand and grow things on it in a way that improves the ground rather than destroying it (conventional agriculture) you own an asset that pays you. Permaculture is a cool thing.
Real estate can be make you rich and it can make you poor. It really comes down to location and property type as well as timing.
I bought single famiy residentials right after the market crashed. Pickedf up 3 houses over 3 years. Each one of the is not worth more than what I paid for it and it also earn some cash from being rented out.... but there are some expensive lessons learned being a landlord.
Well fuck you and all those Wanna be Blackrocks: a house is not an investment, a house is a home.
I hope, "Landlord", you get totally fucked over by the peasants that rent your shit houses - you will fucking deserve it my Lord. Just fuck you if you don't rent your houses to buy. You are just a tiny, small version of all the big greedy assholes that we on ZH hate so much.
OK, so I'm biased - I built my own house and raised a family in it. Had a daughter and a wife lay in state in it before I buried/scattered ashes on the land. Now I'm waiting my turn, in my house, in my home. I am, in my own peculiar way, a very lucky guy.
If you are reading this, you either get it or you don't.
N-F-P
In 1995 I was left with a choice: I could continue to pay £300 into a pension scheme, which, fter 15 years was worth less than I had paid in plus the tax the Goverment credited to it. Not some crappy Pension either, 2 pensions in fact Scottish Widows and Pearl.
So I bought a house, refurbished, mortgaged at interest only, rinse and repeat x 6
I had thought I was doin the right thing getting pensions, turned out I was not.
For those of us NOT into Financials, we do the best we can, Buy-to-let has saved my bacon and means I can now sell off a property every 5 years or so into my retirement. I control it, I work on the properties, decisions are mine to make.
Maybe you think Landlords are bad, and maybe we are, but we were mostly (I certainly was) pushed there by other circumstances.
NFP. As a landlord that doesn't gouge renters, that provides clean affordable properties to the elderly and middle class, and always keeps my properties in tip top shape I say FUCK YOU for lumping me in with Blackrock. Get a clue Dueche bag, I don't take section 8 or title 19. I also give everyone a $50 break on rent in December. So shut the fuck up with your over generalizations.
I am a long-time visitor to these pages, and seldom post. But, NFP's post is an example of an ignoramus and bleeding heart liberal which are at the heart of this country's problems. I don't own any rental properties - but if I save up my hard won money and want to buy an investment property. You can be damn sure I don't want some fucking cunt telling me what I can and cannot do with my own money.
Go Fuck Yourself You Fucking NAZI.
How about we see the krone fail? That would make the market more interesting.
"Copenhagen home prices rising at 12% per year (or more) and yet the Danish central bank is operating on the assumption that headline inflation is less than 1%?"
That sounds like the US Federal Reserve. Denying food, housing and other cost increases.
The EU will fail now that the globalist have forced Islamic refugees onto the Europeans.
It is pretty obvious that central banks have chosen the path of runaway inflation to try and debase the debt.
As TinyTim would say, "God bless us. We are all fucked. Every one."
if only Tiny Tim and Johnny were around, I wouldn't give a fuck about anything.
Is this "liftoff" or simply moar green shoots?
So many cities, so many housing bubbles. I have been tracking some London properties. Bubble is not the word for it. A person owning a shitty old 1960's council flat, part of 90 similar ones, built as low income housing, can earn far more in house price inflation than they ever will at their shitty job. Flats have seen their values rise faster than an average worker's wages. One place I tracked was up 33% in 2 years, valued today at 1/3 of a million pounds. Because it is in greater London, it is fast rising to 1/2 a million pounds for a shitty flat.
It is going to make 2007 through 2009 look like a picnic when the shit hits the fan.
"Hey listen, we'll pay you negative interest on your savings, and make the valuation of your home go up so we can raise your taxes, deal? It's because we care."
Well thank GOD someone cares.
"it's for the children...."
Crashing up. You feel wealthy until you realize you can't afford anything unless you were already rich.
Property prices in Copenhagen have risen 40-60 percent since the middle of 2012,
Henry George and before him, the Classical economists knew that free markets were to be free from rents. Property especially, since it is fixed, does not fit into suppy and demand equations.
More money chasing after a fixed asset class, results in that class having its price increase...no new supply comes on line at the rate of money demand.
Credit as money is hypothecated into existence, so low rates induce a bidding war. People put themselves on a debt treadmill in order to have some place to live.
This means that they have to grab money out of the future to pay for loans taken out today.
But, the way credit as money vectors, it will not be available in money supply in future. It will drain first as usury into banker pockets, and then later it will disappear into principle. The debt instruments will always want back more than what was created.
For the part that vectored into oligarchy pockets, it will then try to direct society and make outrageous demands, even war. War creates new debts to pay old debts, and hence old debt holders are thus made good.
Prices and taxes do not go up simultaneously. If propety is taxed properly, that is factored in before bidding. Property has to be taxed for its site value - it use value. Even in a non credit money system site value taxation is required, to thus prevent bidding wars.
What is bid up in price is pledged to the banker in terms of seigniorage he gets up front on the note - effectively it is usury as it is a taking for nothing. It is also a time shift, as the future is taxed to pay for today.
High prices for housing have knock on effects, as future generations are priced out. Those who were sitting on property with old debts, find their property sells for higher prices and thus future is screwed to pay for today. The oldsters who were "asset" holders, and had their asset bid up unnaturally, make out - even though they did nothing to make the gains. The future always comes, and the next generation is pissed off.
Today's generations better figure this stuff out fast, or there is going to be a generational war. The youngsters cannot figure out why the oldsters are giving them a screw job. Worse, the money system is self defeating, as young people are not going to have babies if they cannot have housing.
The credit money system is defective and usurious at its most fundamental level. It needs to be shit canned.
A sovereign money system can be implemented overnight, with a simple law change. So we risk humanities extinction because we cannot make a law change? How stupid are we.
www.sovereignmoney.eu
Around these parts in the US they doubled during the housing crisis. Oh, and we got in late.
Here in Denmark we actually have a property tax like George Henry wanted. It is called "grundskyld", and is basically a tax on the part of the land value that is because of the extra value the land gets because of the development of the surrounding area.
But back to the article: It is only in the centers of major cities here in Denmark we see this bubble. Slightly raising property prices in the rest of the country, but not (yet) a bubble. Our "problem" here is that we have a unique mortgage system that attracts investors:
Housing here is supported by callable bonds backed by property. But there are strict rules, like no more than at most 80 percent of the property value (less in some cases) can be financed by these bonds. There has never been a default of any of these bonds, due to the 20 percent haircut rule, although this system has been in place for more than a hundred years.
Because of this, and because Denmark is considered a "safe" economy by investors, these mortgage bonds are AAA rated. But because investors now hunt for yield, the rate of these bonds are low. I have a mortgage on my house backed by a 21 year AAA bond giving investors about 2.6 percent interest.
But in Denmark it is now allowed to back long (20-30 years) duration property mortgages by short (1-5 years) loans, which are refinanced periodically. Looks like nobody here ever heard of duration risk. The long mortgage bonds are as safe as govenrment bonds, but the short ones are risky. Loans backed by these shorter bonds have a lower interest rate. In some cases close to zero interest. And of course this makes property values go up.
And why not? Here small savers get no interest on their bank accounts, and big savers have to pay for their deposits. So why not put the capital somewhere it does not have a negative yield?
Cool. Sky high taxes because things are so great.
Taxes properly placed lower costs.
Think of it this way, nourishing a tumor makes it grow, denying it blood makes it shrink.
Taxes on income deny producitivity, and thus are regressive. Taxes not issued on unearned income allow rents, bascially a cancerous tumor to grow. Unearned income is a free lunch, but there is no thing as a free lunch. It is really the shifting from one party to another.
This shifting takes the form of high prices. High prices are a hidden tax.
People are not accustomed to seeing this stuff as it is not taught in schools.
Overt taxes are easy to see, and hence are considered 'unfair' but nowhere is the analysis done about lowest cost value economy.
For example, what is the cost of Fukashima? Not recognizing that inelastic markets should be regulated, the Fukashima operators wanted to make more "profit" for the here an now, but the future costs are very high, almost incalculable.
Taxing rents actually produces efficiencies and lowers prices to their true cost value. Unearned income and rents should be taxed, and property should be taxed for its site value.
TINSTAAFL
https://en.wikipedia.org/wiki/The_Moon_Is_a_Harsh_Mistress
Anything but cash, right?
Dump it into the stock market, bonds or especially real estate.
Everybody needs a place to live, right?
So the purpose of negative interest rates is to continue the upward march in nominal price of the large asset classes. Shocking.
Denmark lives by exports and dies by export to the US, Europe and Asia hence they killed their currency to keep their products competitive with a side effect of negative rates. In the same time they killed their own local economy and small business. And those mortgages that pay you money back no one but bankster cronies have them, if fact you can't get any mortgage anymore Denmark only high interest in dollars which is a suicide. The speculative money moved in to destroy danish society.
NIRP DESTROYS;
More independent views on economy can be found at:
https://contrarianopinion.wordpress.com/economy-update/
I disagree: Exports are mainly to Germany and the rest of the eurozone and Scandinavia. And it is generally easy to get a mortgage for up to 80% of the property value here in Denmark, although I have to agree it can be harder in some parts of the country. The currency problem is that DKK is too strong, but our central bank has no problem maintaining the peg to EUR.
pushing millions of new legal and illegal immigrants into an already tight bubbled housing market. doesn't sound rigged or planned to me
if only that was the reason, but, no, they are there to be blamed for explosions in the israel iran war.
These psychos running Central Banks are blowing the fiat system up.
I can only assume this is their intention. There's no other explanation. The question is do you:
A. Milk the cow till it dies by riding on the momentum asset bubbles fuelled by NIRP/QE.
B. Get out of dodge altogther (e.g. physical assets such as gold/food etc).
If you're clairvoyant, go with A. Otherwise, option B and you'll come out the other side of the storm brewing.
If negative interest rates come to the U.S., it only will be because the TBTF banks have so many underwater foreclosures that they will be willing to bribe the Congress to set interest rates negative, so they can offload their overpriced foreclosure properties onto suckers who are willing to pay the higher price that must be paid for a -previously- financed house.
Why are these suckers willing to pay the higher price? Because it looks like free money to them. They borrow the money from the bank that has title to the property. And LOOKIE HERE! we'll give you money (with these new negative interest rates) to borrow the money to buy this home. How can you say no to a deal like that?
And then they'll fasten the iron clamp with the heavy short chain onto the debt slave's leg and let him try to pay the principle off for the next thirty years. LoL!
The young don't have a clue how long thirty years is. You're an old man when you add thirty years to your life at the point you're signing that loan paper for your first home. There's very little possibility any of these youngsters will get through thirty years without defaulting on such a loan. Life just ain't like that... Divorces, illness, kids, unexpected expenses, stupidity, profligacy and even gluttony take their toll on the reality one expects to unfold when they're young.
Reality is infinitely complex, and when you're young, you ain't seen even half of what is coming your way, and that will be completely impossible to dodge because you cannot foresee it.
The old say, "If only knew when I was young, what I know today." And that's bullshit, because when they were young, things weren't like what they are today. That's what life is like. Life is one quick changing kalaidoscope of a rollercoaster ride. There are times when it's going to be so crazy and upsetting you're going to be worse off than vomiting your brains out!
Bored now? Wait a little while. The repeditive SHTF-sense about reality increases with age. What's next?
You think I'm kidding? People commit suicide the ride is so terrifying! It just gets to be too much, and alcohol. and drugs just make it come worse and that much faster!
The Amish have the right idea, even if they're not half militant enough.
War is already upon much of the world. Just pray it doesn't reach you, as even you can become a shuffling, world-wandering refugee.
Depression is upon all the world. Just pray starvation doesn't get the population that you're a part of restlessly moving in search of something to eat.
I agree with the Amish part, they got it right it seems. I already got the beard, and am working on getting the clothes. Having trouble with the horse and buggy part however. Might have to turn to walking.
I wish someone would sue these central bank crooks for fraud or something. They deserve a class action lawsuit taken against them
No worries for them there, the payout would simply be printed. It'll take a little more persuasion than that.
Important question: Are the interest rates for these loans variable? Negative interest rates give banks a double edged sword to use on borrowers and savers. Negative interest rates entice borrowers to accept very large loans they otherwise would forgo. From the borrower's perspective, the loan appears to be a gift and seems like a no-brainer, since the bank will pay the borrower to borrow. It seems like the only one getting screwed is the saver, who has his savings slowly eaten by negative rates. This is one edge of the bank's sword. But let us heed Proverbs 22-7, which states: "The rich rule over the poor, and the borrower is slave to the lender...". The other edge of the sword is the banks' control over the borrowers' assets. With such a huge loan outstanding, all the bank needs to do is raise interest rates on variable rate loans into positive territory. The borrower then can either service a gigantic loan with payments dominated by interest, or default, in which case the bank now owns the assets. Saver and borrower both get screwed.
Will the real inflation rate stand up please.
They also have consumer debt exceeding 500% of GDP - a world record, plus the money supply has gone parabolic - same in Sweden and Norway (Norway is a junkie, and oil it its heroin): http://www.acting-man.com/?p=39052