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...