Author Topic: Negative interest rates take investors into surreal territory  (Read 22798 times)

SharperDingaan

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Re: Negative interest rates take investors into surreal territory
« Reply #10 on: June 30, 2019, 07:14:22 AM »
Over the long-term, CB's will do everything thet can to ensure that the nominal value of housing does NOT decline. If only because municipal taxes are an annual % of value, & DIY/Construction/Hard Goods etc. rely on the nominal value of property continually rising. At the macro level, for housing to fall in real terms; inflation would have to continuously exceed targeted growth in money supply (2% in most cases). Very unlikely, and for quite some time.

The reality of course is that the higher property values go, the less a conventional mortgage works.
In todays environment, cashflow for debt service is static (or declining, re the 'gig' economy); under conventioal mortgages, higher property values, can only be financed if rates are lower. Solutions to date, have been to change the physical asset (size, location, shared ownership, etc.); not the method of financing.

A conventional mortgage with a negative rate, means the banker pays you to borrow! Not going to happen.
The solution of course is to seperate the land and dwelling values; the bank buys the land and leases it to you for the useful life of the dwelling, you just buy the dweling to live in. At end of land lease the dwelling is demolished, and replaced with new build of highest & best use at the time. Essentially a version of the existing UK approach, but where pension funds ultimately own the land, you live in the most up-to-date dwelling practical, and we all benefit from systemic baked-in economic growth/recycling.

People just need an affordable place to live & raise families; they don't need to own the land that the dwelling stands on.

SD
 




« Last Edit: June 30, 2019, 07:17:24 AM by SharperDingaan »


kab60

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Re: Negative interest rates take investors into surreal territory
« Reply #11 on: June 30, 2019, 08:14:35 AM »
No idea what to make of it, but my 30 year mortrage runs at minus 0,43 pct. at the moment (floating rate, changes a couple of times a year) with the first 10 years being non-amortizing, but since the rate is negative I actually do pay down the loan.

Means there's quiet a bit more to invest each month (coming from 3 pct. amortizing fixed 30 year), but strange times indeed.

Couple of weeks ago banks here in Denmark opened a new mortgage bond fixed 30 year at 1 pct. And Austria are looking to sell a 100 year bond that pays 1,2 pct. annually. Strange times indeed. I could see the attraction in loaning at 1 pct. for 30 years, but the risk/reward from the other side looks pretty poor I'd think. Since I'm not very interest rate sensitive I'll stick to ultrashort duration (which has been a winner for a looong time), but if rates actually DO go up a 1 pct. loan would be big.

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #12 on: June 30, 2019, 09:44:40 AM »
Aren't home prices in Denmark going up a lot though? Netherlands has issued a lot of interest-only mortgages over the last few years and home prices are going up 10% a year.

The central planners claim inflation is low in Germany. Yet, Berlin passed a five-year rent freeze a few weeks ago because rents were going up a lot (7-10% a year for the last few years.)

http://www.bbc.com/capital/story/20190226-berlins-radical-plan-to-stop-rocketing-rents

Insurers and other such bondholders are the ones who are getting robbed by the central planners. It is safe to say nobody from the Bundesbank will ever be the chief of the crooked ECB, poor Weidmann.

We had negative amortization and interest-only mortgages in 2007 in the US too. But we haven't had them for the last 10 years, US regulators have been very strict.

kab60

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Re: Negative interest rates take investors into surreal territory
« Reply #13 on: June 30, 2019, 10:57:22 AM »
Home prices in Denmark is very divided. I live in a flat in Copenhagen which has basically doubled since 2011, and it's more expensive in Copenhagen than it was in 2007, but prices have actually come down in the last year - anectodally around 10 pct. But that's due to Danish politics (stricter lending requirement, down payment of 5 pct., expected increase in property taxes on apartments). Other parts of the city are still way below 2007 levels.

Rates being where they are the housing market here doesn't look expensive. I ran the math the other day since a combination of falling RE prices plus falling rates got me interested, and if I put down 20 pct. LTV cash and borrow 80 pct. at 1 pct. 30 year loan (amortizing) I could probably get a 8-10 pct. (levered) return from paying down the loan since the cost of renting is "way" higher than the cost of buying.

Now I don't wanna go long RE atm (and I am somewhat already with our own flat) - espescially with all hassle involved - but the math is interesting since the Danish RE system is a bit unique. So you can be wayyy technically insolvent and the debt still isn't possible to call for the lenders (it's a bond) as long as you pay on time. So the risk is you can't find someone who'll rent your place or rents drop massively, but all trends point to increased urbanization.
« Last Edit: June 30, 2019, 12:44:22 PM by kab60 »

John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #14 on: June 30, 2019, 12:15:17 PM »
Great that you shed some light and nuances on the Danish situation about real estate prices, kab, thank you,

I have a couple of more technical questions about how your mortgage with negative interest works :

1. In your post about your mortgage you indicated, that the negative interest isn't paid out to you, but is booked as a repayment on the principal [,so despite you have a standing loan/mortgage for the first ten years, the balance of the mortgage is going down over time with the negative interest payments]. Have I understood this correctly? [Cigarbutt actually also posted about this phenomen recently here on CoBF not so long ago.]

2. I suppose you are still charged reserve fund contributions, and are paying them. Have I understood this correctly?

- - - o 0 o - - -

Yes, indeed, the whole thing is very weird.
« Last Edit: June 30, 2019, 12:42:42 PM by John Hjorth »
”In the race of excellence … there is no finish line.”
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kab60

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Re: Negative interest rates take investors into surreal territory
« Reply #15 on: June 30, 2019, 12:51:16 PM »
Great that you shed some light and nuances on the Danish situation about real estate prices, kab, thank you,

I have a couple of more technical questions about how your mortgage with negative interest works :

1. In your post about your mortgage you indicated, that the negative interest isn't paid out to you, but is booked as a repayment on the principal [,so despite you have a standing loan/mortgage for the first ten years, the balance of the mortgage is going down over time with the negative interest payments]. Have I understood this correctly? [Cigarbutt actually also posted about this phenomen recently here on CoBF not so long ago.]

2. I suppose you are still charged reserve fund contributions, and are paying them. Have I understood this correctly?

- - - o 0 o - - -

Yes, indeed, the whole thing is very weird.
1) Yes, the negative rent reduces our outstanding loan balance - even with the first ten years being "interest only". I think they struggle somewhat with the implications of paying to lend me money so they reduce debt outstanding instead.

2) Yes, in practice I do pay a bit after all costs and taxes. So the interest is what it is (-0,43 pct. now), but then the mortgage servicer charges some 80 basis points for servicing the loans which is variable depending on loan type (lower on fixed rate loan than floating), LTV etc. My mortgage servicer is Nykredit which is membership owned, so if you have your mortgage loan through them (which is actually a bond, then you get a discount on the servicing (like 15 basis points of discount I think). And then they pay you 250 DKK each quarter as well. :) It's pennies but so is the payments on the mortgage. No wonder banks are struggling.
« Last Edit: June 30, 2019, 12:53:07 PM by kab60 »

John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #16 on: June 30, 2019, 01:22:53 PM »
Thank you for the elaboration here, kab - it's much appreciated, & nice to actually know.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #17 on: June 30, 2019, 01:51:16 PM »
More Internet searching found:

ECB covers up banking problems at Monte Paschi:
https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium
"The manner in which the ECB tackled the Italian lender’s problems, its first big test as a banking regulator, threatens to undermine its credibility. ECB President Mario Draghi has yet to win over the many analysts, politicians and others who remain skeptical of the authority’s ability to act as a strong, strict and independent supervisor. To restore investor faith in Europe’s banks, the regulator needs to be more accountable and transparent. This bailout suggests that the ECB may not be up to the task."

IMF warned that Portugal has a real estate bubble again.
https://www.theportugalnews.com/news/imf-warns-of-risk-of-real-estate-bubbles-in-portugal/46330

Dutch central bank warns housing market is a risk
https://nltimes.nl/2019/06/05/dutch-housing-market-biggest-stability-risk-netherlands-central-bank-warns-hard-brexit

Spain property prices tripled between 1996-2003. Needs more reflation before recapturing the peak
https://seekingalpha.com/article/4266705-busted-housing-bubble-1-morphs-housing-bubble-2-spain


ECB says it will keep rates low for another year. I think the re-bubbling will continue for a while even as they pretend there is no inflation. The ECB is a banana central bank.

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #18 on: June 30, 2019, 02:23:19 PM »
https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium

To get an idea of what the ECB is capable of and why they need zero rates for at least another year (or maybe for the next 100 years), these are some quotes from the article. Draghi was chief of Italy's central bank before he became ECB chief.

"The bank took to masking its burgeoning losses with a series of complex derivatives deals. Those transactions were hidden from public view until I later reported on them. Once they were disclosed, Monte Paschi had to restate its accounts twice."

To pass muster with regulators, firms need a ratio of at least 4.5%—or more than seven times what the report estimated Monte Paschi had at the time.

In short, the ECB knew in 2016 that the Italian lender appeared to be insolvent. Neither party disclosed this critical assessment, even as the bank’s bonds and shares were trading publicly


It looks like Monte Paschi had a severe capital shortfall around the time of its bailout. EU rules should have disqualified it from getting the so-called precautionary recapitalization it received.

But 17% of its loans are still classified as nonperforming, a figure that is almost twice as large as the average for Italy’s top nine banks, according to Bloomberg data.

"State and nonprofit ownership had made the bank vulnerable to local political interference. It frequently lent money to court power. In doing so, it tended to overlook credit risk."

Monte Paschi’s failings included:
Accounting for collateral twice, or even multiple times, with different values;

« Last Edit: June 30, 2019, 02:26:27 PM by RuleNumberOne »

SharperDingaan

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Re: Negative interest rates take investors into surreal territory
« Reply #19 on: June 30, 2019, 03:35:56 PM »
Lots of possibilities here ...

Monte Paschi evidences that the impact of a European CB put on a DSIB (Domestic Systemically Important Bank); is much, much higher than most would expect. The DB, or a Monte Paschi, that suffers a market crises of confidence is not going to be allowed to fail - no matter what. So when the sh1te seriously hits the fan, use the opportunity to buy a longer dated call at a low strike, on said bank ;)

In most places only a domestic citizen, can buy domestic RE using a domestic mortgage; however it is not particularly onerous to get around the restriction if you hold 'dual' (EU/UK) citizenship. Put up the equity on that Danish property, let the property appreciate 20%, remortgage to pay yourself back, and let the bank pay down your mortgage at 0.49%/yr ;)

... and if it were a Danish bank that got into trouble, much of that equity you put up would be profit!

SD