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.
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
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.
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.
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.