What are the prospects for mortgage interest-rates?

Today brings us two sides of the same argument. What I mean by that is that many are affected by what mortgage-rates do. The most obvious implication is for those with a mortgage or those with plans to buy using one. The follow-on effects may even effect more than a few who rent via the way they affect the calculations and profits of those who buy with a mortgage to then let out. On the other side of the coin are central bankers who are seldom happier than observing house price rises which are usually excluded from inflation calculations and hence can be claimed as boosting economic growth and wealth. In the credit crunch era we have seen central banks reduce mortgage-rates to boost house prices in a variety of ways. Firstly there was a wave of large official interest-rate cuts, then QE style bond buying to have another go and then what has become called credit easing which guess what? It reduced mortgage-rates again.

Denmark

This has hit the financial newswires over the past week and the reason for this is as follows. From Bloomberg.

“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry.

For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.

So at the institutional level there is a wide range where the interest-rate is negative. Of course the banks will be looking to add fees to this but it does pose a question? It seems to have also been on the mind of the central bank as the central bank Nationalbanken published this yesterday.

The average administration fee on the Danes’ mortgage loans is decreasing because the Danes choose more secure loan types for their financing – especially fixed-rate loans and loans with instalments. The administration fee is now, on average, 0.87 per cent, which corresponds to a monthly payment before tax of kr. 723 per kr. million borrowed.

So we see that heading forwards a lower fee will be added to the interest which will also be heading lower. For perspective the Nationalbanken was in reflective mood last August.

Interest rates on Danish mortgage loans have fallen since 2008. From an average interest rate including administration fee of close to 6 per cent in 2008 to under 2.2 per cent in August 2018. This is the lowest level since the beginning of the statistics in 2003.

Average interest-rates take their time to change so let us move to new business. According to its database we have seen mortgage-rates as low as 0.75% with fixed-rates in the 5 to 10 year range being as low as 1.17%. So we await the monthly data for May expecting new lows for these numbers.

For those wondering why Denmark might be taking up the role of a crash test dummy there is this explanation.

Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years.

The explanation starts well enough and regular readers will recall that I have expected the impact of official negative interest-rates ( the certificate of deposit rate is currently -0.65%) to build over time. So far so good for that theory. However as the Nationalbanken tells us that the over ten-year mortgage-rate was 2.2% in April I would suggest the Bloomberg journalist sits down and enjoys some Graham Parker and the Rumour.

Don’t get excited Don’t get excited Don’t get excited see
Don’t get excited Don’t get excited Don’t get excited Don’t get excited
Baby listen without thinking

Turning Japanese?

This theme just runs and runs and we can stay with Graham Parker as we do some Discovering Japan. Here is rethinktokyo.com from January.

Japan currently offers historically low interest rates, with rates for 10-year fixed mortgages generally available under 1% for the initial set period. Variable loans are currently even lower; for example, MUFJ bank offers 0.65% for a floating loan.

Actually fair play to them for having a sense of humour.

 The rate is not fixed and could go up

But the Japanese themselves do not believe that.

In 2018, more than half of mortgages taken out were variable to take advantage of those rates.

That is interesting as for example in the UK people have shifted in the credit crunch era towards fixed-rate mortgages and now we see Mrs. Watanabe heading the other way.

As an aside the fees paid when you buy in Japan are not low.

We need to add approximately 9% for taxes and the brokerage fee.

The Trend

This can be found in bond markets and as ever the leader of the pack in several ways is the US one.  As I type this the Treasury Market is continuing its rally and the ten-year yield has fallen to 2.23%. This means that Mr and Ms Market are putting some pressure on the US Federal Reserve which has responded marginally with the rate it pays banks or IOER which fell from 2.4% to 2.35% at the beginning of this month. Let us move to Mortgage Rates which tells us this.

which means we’re still operating on the edge of the lowest levels in more than a year.

Actually they should be lower but are being held back by this.

Notably, there has been increasing chatter regarding the re-privatization of Fannie Mae and Freddie Mac.  If that happens, the aforementioned government guarantee would no longer be in place.  This alone could explain some of the drift seen in mortgages vs Treasuries lately.

So if that chatter fades we will see US mortgage rates head lower following the bond market.

If we move to Europe we see that what might be called negativity is back. Or the ten-year yield of Germany is at -0.16% and that if we take a broad sweep is part of the move which has pulled the rates on Danish mortgage bonds lower. If we look at the German situation we see that things have been on the move so far this year because of we take the first mortgage on the Bundesbank list we see it fell from 1.86% in January to 1.74% in March.

Comment

The trend in bond markets has been upwards for a while which means that they will be applying pressure for fixed-rate mortgages in particular will be singing along with Status Quo.

Down down deeper and down
Down down deeper and down
Get down deeper and down

There are some factors holding this back such as the Fannie Mae situation in the US but we seem to be entering a new phase of the cuts. Regular readers will not be falling off their chairs at this point as we have been expecting this as we wonder what historians of these times will  regard as normal?

This poses a problem for the Forward Guidance provided by many central banks and let me start with that of the Bank of England and the emphasis is mine.

The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So guidance towards higher interest-rates. But the markets do not believe this as illustrated by the five-year UK Gilt yield. I have chosen this as it is the one which most influences fixed-rate mortgages. But at 0.66% it is below the current Bank Rate of 0.75% and suggesting a cut rather than a rise and that will feed into mortgage-rates in the UK if it persists.

Still if The Toronto Star is any guide Governor Carney’s mind may be on other matters.

With a possible Liberal defeat this fall in mind, some insiders are already strategizing a path to the party leadership for former Bank of Canada governor Mark Carney.

12 thoughts on “What are the prospects for mortgage interest-rates?

  1. Hello shaun,

    re: ” Denmark has had negative rates longer than any other country. ” and to what effect ?

    nothing much what what I’ve read , groundhog day again in that the Banks are still bust and people have fixed rate mortgages . Thus this lever looses its importance .

    Forbin

    • Hi Forbin

      We are supposed to have been in the recovery phase for some years now. Yet here is the Nationalbanken from earlier today.

      “In the first four months of 2019, Danish listed banks paid kr. 9.2 billion to their shareholders in dividends. This corresponds to a decrease of kr. 2.3 billion compared to the same period last year. The dividends relate to the financial year 2018 and are typically paid to the shareholders in connection with the general assemblies in March and April.”

      On Monday there was a financial stability report and this bit looks less than entirely reassuring to me.

      ” Since 2010, results
      have been underpinned by falling loan impairment
      charges, which were negative in some periods
      due to large reversals. The decline in profits since
      mid-2017 is largely due to lower value adjustments,
      as costs have been almost unchanged and core
      earnings have seen a weak decrease. Income from
      market activities has fallen and in 2018 it was below
      the average for the period 2010-18. A considerable
      dampening of growth would entail higher loan
      impairment charges. Unless compensated by other
      income, this would lead to lower earnings in future.”

      So as you say on we go and another version of this is Deutsche Bank where on the surface everything looks fine. But as its share price falls ( 6.15 Euros tonight) where are the buyers? It looks a steal if we are being told the truth…..Oh hang on.

  2. Hello Shaun,

    I know you dont do politics but George Clooney look-a-likes have a lot to answer for !
    ( re : Liberal party & its leadership for former Bank of Canada governor Mark Carney.)

    you have to giggle at that

    Forbin

  3. I know I can trust you guys with a secret so let me confess I just don’t understand negative interest rates. I don’t understand why anyone would use them and I don’t know anywhere they’ve worked, that’s even assuming they’re supposed to work. I wouldn’t mind if they didn’t have serious repercussions on the real economy but they do. How do you explain to the man on the Blackpool omnitram that money is so abundant it has a negative value? It’s just potty.

    • I think a large part of it is the unintended consequence of a race to the bottom with exchange rates after the 2008 crisis as each country / trading block tried to defend its competitiveness against the rest. They then found that it propped up asset prices and rather liked that as it avoided embarrassing bank balance sheet questions. Having got this far they have no idea how to get back to ‘normality’ (just what DO they talk about at Jackson Hole etc? – clearly not the hole they are in) and so it goes on.

    • Hi Peter

      My subsequent blog on the speech by Dave Ramsden shows him heading in the direction you suggest. Although you do have to read between the lines as he churns out the usual forward guidance.

  4. Bill,
    There is also the insane situation – also created and fostered by the banks – of such nervousness and uncertainty over the state of the economy and stockmarkets, that some investors are more concerned about the return of their money rather than the return on their money

  5. The property crazies get rewarded again, looking at the 5 year gilt yield which is the closest proxy for the fixed rate mortgage(also of five years) many of the people I work with are going to love re-financing again at lower rates after having done so numerous times in the last ten years.

    Looking at the chart it wouldn’t be unreasonable to see another quarter percent off sometime in the next twelve months, a quarter cut whilst at the same time Carney is waffling on about raising rates!!!

    So we now have a veritable positive feedback loop of lower interest rates leading to a liquidity bubble that gets re-invested in the bond market that causes yields to drop lower and central bankers throw their arms up in the air in faux exasperation as if they have nothing to do with it and are powerless to stop it while at the same time threatening to raise rates.

    Can it get any more insane???

  6. Great blog as usual, Shaun.
    The Bank of Canada announced it is maintaining its overnight rate at 1¾% today. The news release notes: “The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.” The problem with this is that while CPI inflation was 2.0% in April 2019, excluding mortgage interest cost it was 1.8%. The new operational guide, based on three measures, none of which explicitly exclude mortgage interest cost, stand at 1.8%, 1.9% and 2.0%. By contrast, the previous operational guide, CPIX, which does exclude mortgage interest cost, stands at 1.5%. The mortgage interest cost index itself had an inflation rate of 8.2% in April, up from 8.1% in March. While the Bank of Canada hasn’t raised its overnight rate since October2018, it will still take a while before the impact of multiple rate hikes fades away.
    Tomorrow evening Jurassic Park will be flooded with people when the Toronto Raptors boldly go where no Raptor has gone before.

    • Hi Andrew and thank you
      Let me wish the Raptors well as I know they are now 1-0. I have not seen them play yet but I did see a little of the Warriors when they played Houston and Steph Curry really stepped up so he is in form and a threat. I also do not know how the US would respond to a “foreign” team winning the NBA,

      As to the inflation data it reads like the BoC is making in reverse the mistake the Bank of England made with the RPI in 2009 which is not allowing for its own actions. Surely someone with a spreadsheet there can calculate the numbers ?

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