Are mortgage rates in Denmark part of a “mad world”?

This morning has started with a familiar drum beat for these times as we see higher bond prices in Japan and the consequent record lows in yields.

The 10-year JGB yield edged down half a basis point to minus 0.160 percent, after earlier setting a record low of minus 0.165 percent…..The 20-year JGB yield also set a fresh record low of 0.180 percent, shedding 1.5 basis points, as did the 5-year yield, dropping half a basis point to minus 0.275 percent .

As prices are going “higher and higher” and yields “Fallin’ ” we are now seeing consequences for the ordinary man and woman and the obvious place to look for this is Denmark. You see it has the longest history of official negative interest-rates with the certificate of deposit rate being cut to -0.2% on the 6th of July 2012 and being -0.65% as I type this. So we about to see four years tick up albeit with a brief spell in 2014 when the rate was raised to the apparent heights of 0.05%. Oh how the Nationalbanken must wish it could erase evidence of that move! As it was wrong footed by a policy change at the European Central Bank with more deception than any player I have seen so far at the 2016 European championships.

Such a thing is especially troubling as we mull how many central banks have started tightening cycles only to find that they cut again and in Denmark’s case to record lows. Although right now it is at -0.65% so just above the nadir of -0.75%. That is quite a contrast to the “expert” view which has had a consensus that negative interest-rates were not going to last long.

Mortgage Rates

This is one of the ways we can investigate the impact on the ordinary Dane and there are new developments in this arena.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

As you can see the Danish mortgage borrower can borrow as cheaply as the US Government and if the coupon drops to 2% well they can borrow more cheaply than the UK government over a 30 year period. So the ordinary borrower has the potential to lock in very low levels for mortgage-rates over a 30 year period in which case this particular shadow of the credit crunch era will stretch to at least 2046.  From the way the article is written 2% seems not far off a done deal if 1.5% is also in prospect,although the later feels subject to some hype.

As to whether the Danes will respond well the answer seems to be yes if last year was any guide.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float……Fixed-rate loans now make up about a third of Danish mortgage lending.

Oh and as to the below isn’t everything these days? The emphasis is mine.

The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

I do not know about you but the statement below seems to be rather tempting fate.

What’s more, borrowers can’t walk away from their debt.

Negative Mortgage Rates

There has been a lot of speculation and hype about this but the Danish Mortgage Bank Association keeps a weekly record of the yields on Danish mortgage bonds. The short-term rate for Kroner mortgage bonds was last at -0.23% and has been negative for all but two weeks in 2016. If we move to Euro mortgage bonds as we recall the Krone is pegged to the Euro then the yield on short-term mortgage bonds was last -0.13% and it has been negative for all of 2016 so far.

Back in April the Wall Street Journal was on the case.

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.

If only his name had been Hans Christian Anderson…

House Prices Rise

Even the IMF is on the case.

Fueled by historically-low interest rates, house prices have risen rapidly in recent periods—especially for flats and in Copenhagen……..the market bears close watching since a continuation of the uptrend would soon bring real house prices in these segments back to pre-crisis levels.

The data is delayed but the owner occupied flat index was up 9.2% in the year to March. The Nationalbanken suggests that the only way is up baby.

expectations of further positive developments in the housing market.

First-time buyers will of course have reason to disagree.

The debt problem

The IMF tried to sweep this issue under its carpet.

and the absence of an attendant rapid build-up in household debt.

That seems fine except if we note this from the Danish mortgage association.

The market value of all Danish outstanding mortgage bonds (traditional mortgage bonds, covered bonds and covered mortgage bonds) exceeds DKK 2,300bn (app. EUR 310bn). The Danish mortgage bond market is actually more than four times larger than the Danish government bond market. The market value also exceeds total Danish GDP.

Sadly it is out of date in terms of data however i helped out a bit on August 24th last year.

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…

Comment

There is much to consider here but whilst the mainstream media continues of course to blame this on the Brexit referendum there is a culprit even closer to home. The Nationalbanken pegs the Krone to the Euro which means that Danish securities and an extremely close proxy for Euro area ones whilst the peg holds. The consensus view on the peg  is given by Bloomberg.

The man running Denmark’s biggest pension fund is convinced nothing can break the country’s euro peg.

This means that the 172.2 billion Euros of the third phase of the ECB’s covered bond purchases will have a strong effect on Danish covered bond prices and yields too. Odd that this is missed and of course there will also be an impact from the new corporate bond program which is doing this today.

ECB out again this morning buying more short end autos, 2-3y Chem names & 7-10y Pharma names (@creditmacro )

What could go wrong?

Also with the strong influence of the housing market on the economy of Denmark you might think that the economy would be surging, certainly economics 101 tells us that. But the last 3 quarter have gone -0.6%, 0.1% and then 0.5% so an improving trend yes but just under flat overall. If we look bank the Nationalbanken notes a credit crunch era of relative underperformance.

The low rate of growth in Denmark is to a large extent attributable to weak domestic demand.

On the other side of the coin Denmark does have substantial pension fund assets. How are they going though in a negative interest-rate world…..

Time for Tears For Fears or more recently Gary Jules.

When people run in circles it’s a very very
Mad world
Mad world
Mad world
Mad world

 

 

 

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8 thoughts on “Are mortgage rates in Denmark part of a “mad world”?

  1. HI Shaun,
    Casting my mind back to the Sub-Prime disaster in the US I seem to remember that many borrowers did indeed walk away from their debt. In some cases leaving the banks with the keys to virtually worthless houses.

    Is the USA alone in the world in the way they attach mortgage debt to the property rather than the borrower?

    • Hi Eric

      I think it is something of a sliding scale as even in the US someone will find it impossible to borrow for a few years. Other nations such as Ireland weakened their laws after their housing bust. But the US does appear to be at one extreme.

  2. Hello Shaun,

    As it amazed me that MSM grew accustomed to ZIRP and my predictions this is a 30 year recession cycle ( 2038 approx end) point to me that they will think normal will be borrowing 100 GBP and paying back 97GBP

    How is it that the Pension companies are not howling about this ?

    I’m still wondering what the end game is in all of this

    Banker 2 , people 0 ?

    Forbin

    • “How is it that the Pension companies are not howling about this ?”
      Fear.
      The whole system is bankrupt, bust, kaput and finding out how and where the weaknesses are does no-one any good, but puts a lot of pension fund employees and managers out of work.
      We’re over that cliff and falling; looking up to see the sky is far less troubling than looking down at the ground.

  3. Danish borrowers able to lock in low rates for 30 years. What happens to the banks if interest rates go up ? Economic history of the 1980s US Saving and loan crisis might guide us …..

      • Predictions about the future are difficult, but here are some concerns

        Continued deflation/disflation will further swell bond issuers endebtedness. Bulgaria in 1996 is an unpleasant example of what can happen to a government which lets debt get out of control. Greece has a debt crisis and it is very unpleasant for the Greek people.

        If we were to have a resource squeeze – 1970s style oil squeeze or a food shortage we may see hyperinflation as too much liquidity chases inadequate resources.

        Pensions are facing a demographic crisis and this is being made worse by the economic harm inflicted by ZIRP on private pension investment funds.

        • Not just pension investment funds, but pension investment as a whole.
          People seeing annuities tank, then pension funds being allowed to run huge deficits until the point where benefits are “redefined”, sneaky help given by govts. to pension funds, like making benefits attainable at 55 instead of fifty, then tax raids by govts, and the morally indefensible (by the ease of which it can be used by businesses) Pension Protection Scheme and other “soft touch” pension regulation, know that there’s very little chance of actually seeing their investment back.
          Why not keep your savings in tax free isas, then, when you retire, you’re likely to have far more than your pension, or if you die, leave it to your nearest and dearest?

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