There's not a significant difference between a 0% and a -0.125% mortgage. If one doesn't cause weird changes to the housing market I don't expect the other to.
0C was the number given to that temperature specifically because that's where drastic changes occur in water. With most materials, there is no significant difference between 0C, -1C, and 1C.
On the other hand, 0% has no known special relationship with the housing market, so there's not really a good reason to expect substantially different behavior at that value compared to -.125% or +.125%.
What's the argument for negative interest rates having any impact on house prices? I would think it would be mostly linear compared to 2%, 1%, 0%, -1%, etc...
For example - if I have a 20 year mortgage on a $240,000 house @ 0%, I have to pay $1,000/month. If the interest rate is -1% then I have to pay ~$900/month. I don't know if that extra $100/month really moves the market on home prices that much.
People would be incentivized to buy the absolute most expensive home they qualify for, which isn’t always a good thing. Dove sorry is the key to investments.
I think you need to look at it from monthly -> house price and not the other way around. If your budget / purchasing power is $1000 /m then your house budget is roughly as follows:
That's _the_same_ house costs 190k if interest is 5% and 310k if interest is 1%. Supply is not flexible at all, especially in the desirable place. Basically hosing prices determined by the maximal mortgage amount, not the house property.
Psychology. Here in the UK the the lemming factor would kick in strongly - toilet paper, bicycles ... negative interest rate. The moment those words are uttered by the BBC you could expect the country to be covered with little puddles of excitement leading to the nearest bank. Some phrases trigger a threshold where reason loses strength - fomo? Panic?
Once rates go negative people have an incentive to take out the biggest mortgage that they can, because they're making money on each.
With negative rates the payments compound. If the interest rate is $900/month, you're paying off $1000/month in principal each month, and making $100/month in profit that is applied to the home equity. You can then go use that equity to take out another loan on the property, make $100/month in profit, repeat. Or go buy a different property with a different lender, if the bank starts getting suspicious. If you can't afford the increased payments...well, that's what a loan is for, particularly one that you're making a profit off. ;-)
I don't think there is a single tipping point the way you think. The same is true now if you consider the other ways you can spend your capital.
a -1% rate on a mortgage with 20% down payment is effetely a 4% annual return on investment.
If you can make 10%/yr in the stock market. and your mortgage is 3%/yr you should be maxing out the loan already and putting your cash back into stocks to make the 7% difference, not another house, if mortgages are 0%, you are making 10%, If mortgages are -1% you are making 11%, ect
The downsides to this strategy in a negative interest rate scenario are the same as they are today: If all your capital is locked up in down payments, you are missing out on stock gains entirely. If all your capital is in the market, you are vulnerable to bubbles and swings there.
The reason folks don't do this is in your last sentence: stocks are not risk-free, and you're vulnerable to market downturns. Or sometimes people do do this, and they get swept out of the market when a downturn happens.
Same thing with bonds, mortgages, and loans: there's default risk.
Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you.
(It's also worth noting that there are a few risk-free assets that offer yields higher than 0%: U.S. Treasuries, and U.S. savings accounts. And there is a predictable carry trade of firms borrowing at 0 in the EU, converting their Euros to dollars, and then depositing in the U.S. at > 0. The risk then becomes currency risk, the chance that the dollar will depreciate, which is also happening.)
>Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you.
I don't think this is accurate, as there is still risk because we are talking about a mortgage, not just a negative interest loan. A mortgage comes with down payment and a house for collateral. You can end up underwater on an interest free home mortgage just as easy as one with a positive mortgage. The only difference is your monthly payment is lower without mortgage interest.
Also, if you default on the mortgage, you are also out your 20% down payment.
The part I find interesting about the current situation is that stocks are sky high going higher, but loan interest is low. This indicates to me that banks and institutions are desperate to park money anywhere but the stock market despite the incredible market performance.
At the end of the day isn't this just a regressive tax in favor of land owners? How many compounding cycles would it take before no one cares about a wipe out in land valuation as it's primarily owned by the extremely wealthy.
Homeowners view this as a zero-sum game. If the 33% of non-homeowners are losing (and they definitely are), than the 67% of homeowners feel they must be winning (even though, arguably, the majority of them aren't).
As the price of homes rises, wouldn't you expect the 67% to shrink? fewer individuals would have the capital to afford a down payment, and some portion of the 67% will liquidate the equity for retirement and other activities.
I have -0.28% on a mortgage which will be refinanced every 5 year. The lenders actually pay me to store their capital. Weird times.
In actuality, though, I also pay a 0.5% "contribution" fee which covers mortgage company administration and collective risk. So the effective rate is around 0.22%.
For the 20y bonds the 0% interest is also just the actual bond rate. The administration fee will have to be added.
The "contribution" fee rate depends on how much of the home value has been mortgaged. Below 60% it is typically around 0.5% because of the relatively low risk (you can probably always auction off the house at get at least 60% even in bad times). When mortgaged from 60 to 80% of the home value the fee is higher.
The interest rate on my mortgage is MAX(12 months Euribor rate, 0%) + 0.5%. Apparently some banks didn't realise to do the MAX() back in the day because surely the Euribor rates are not going to be negative, so there were some instances of negative mortgage rates here.
Yeah, I got a 15 year loan to save about 25% on my interest payments (3% vs 4%). Looking back, that was totally stupid because had I got a 30 year loan, and invested the difference (which I absolutely would have), I would earned a substantially greater return from the resulting stock boom.
I went through 3 refinances last year (also in CA) all at little to no closing costs for a 30 year fixed (4.00% → 3.25% → 2.5%). The math made sense every single time when factoring in the lower monthly payments and negligible closing costs.
At this point I don't know what the point of the loan is anymore. Is there really any realistic intention to ever pay it off? Every single time I thought I had timed the bottom, but rates continue to drop.
I refinanced last year for a 0.125% better interest rate, and the bank paid me $1000 to do it. It was the easiest decision I ever made. Basically, there was $5000 in closing costs and the bank paid me $6000 in points. If I paid money I would have gotten a lower rate, but I already had a great rate.
Now, I'm refinancing again, but I'm paying some money. All in all, my net refinancing costs will be around $2000, but I have halved my interest rate almost, and will now be able to pay my home off about 10-15 years earlier (we just bought two years ago).
The point of paying off loans at this point is so that when the whole system breaks down and people are looking for someone other than themselves to hold the bag, you have no business relations with anyone and nobody with a reason to point at you. Folks who are deeply entangled in the financial system will have a lot of potential enemies if the system fails to supply the expected standard of living to everyone. Folks who are basically self-sufficient with no major financial commitments can ride it out in obscurity.
"Neither a borrower nor a lender be / For loan oft loses both itself and friend." -- Polonius, from Hamlet
If you own property there is not obscurity or hiding from the system. Your name is on the dead and on view for the public (especially with the new law recently passed restricting the privacy of shell corps).
Right, but the point is to avoid people caring about you, not people knowing about you. It's fine to have your name out there and on some public records about where you live if everybody is indifferent to your existence. It gets dicey when you owe somebody money, and they owe somebody else money, and then when there's not enough money to go around they're like "Shoot, where can I find some money? I know, I'll turn the screws on people who already owe me something and just collect what I'm owed." Little details like the precise payback terms of the loan and recourse available tend to get lost when court systems aren't functioning, and people only think "Oh, who owes me money that I can collect from?"
(As a side note, this is an important and often-overlooked point about mass surveillance. There's a huge difference between large data-hoovering organizations knowing about you and large organizations caring about you. Most people's best defense against identity theft or blackmail isn't cybersecurity, it's boringness, and the law of large numbers.)
I've never understood mortgage refinancing in the US. Isn't the lender taking a loss when you refinance, since their 20-year asset will now pay less in interest than before? How does the lender make up for this loss, if the debtor isn't paying the difference every time they refinance to a lower interest rate?
The lender has no practical alternative in most cases other than to reject business outright. The reason they go along with it mostly willingly, is the borrower can typically go somewhere else for the loan. The current lender would just as soon keep you as a customer at 2% (vs the old 4%) than see you go somewhere else.
They don't make up for the loss, they accept the lower rate of return vs losing the customer entirely.
Fascinating, thanks for the info. In Norway, fixed-rate mortgage agreements are always made with a clause mandating settlement of the interest difference, in the case of refinancing or early repayment.
The customer therefore has no leverage over the lender by threatening to take the loan elsewhere. They'd have to pay all of the remaining interest if they wanted to settle the loan, or at best settle the interest difference if moving the loan to a lender with a different interest rate. Assuming both banks agreed to the exchange.
Of course, if interest rates increase, such settlement could also favor the borrower. But that hasn't been the case in a long time.
If you have a $1 million mortgage with 5% interest you are paying $50k interest per year. Meaning you are paying most of your interest at the beginning of the loan. If you are down to $750k after 10 years and refinance to 2% you have already paid around $350k in interest . The bank has already gotten the biggest chunk of the profits but takes a "loss" on the remaining portion.
I refinanced my loan once, it took me 5-6 trips to the bank and bunch of signed papers. My rate is low enough and loan short enough that I won't do this again but the whole process in one of EU member states was quite slow and annoying.
When I refinanced it was one phone call and then e-signed a document. And a week or two later someone drove to my house to get a wet signature to complete everything. It was with the same lender though so may have been streamlined because of that.
Would you mind disclosing which lender you went with to get 2.0%? Are you paying points? I'm using Better.com for a refi in CA also but the "best" I can get is 2.625% with 0.053% ($330) in closing costs. They don't even list 2.0%
Edit: Better.com is actually listing 2.0% rates but with $9,100 in points, based on my property and location in CA.
That exposes you to currency risk. Right now, 1 euro trades for about 1.23 dollars but that can go up or down (1:1.12 a year ago for example) which would effect your payments over the life of the loan because I get paid in dollars but german banks want to get paid back in euros.
That won't even work within the EU. All sorts of barriers exist between EU states making this extremely difficult if not impossible.
You'll need a salary or other reliable income sources in the EU member state where you're buying, banks there won't offer you a mortgage. Never mind you're earning 5 times the bank employee's salary, just in another member state.
You'll need free and clear ownership of a home in the EU member state where you're earning, or banks there won't offer you a mortgage for your home in another EU member state. You'll only get the loan by mortgaging the property local to the bank, not the actual property you're buying.
Some limited exceptions exist for popular holiday countries, but banks will make you pay for that "privilege".
Although fixed rate mortgages are far more popular because they are subsidized by the federal government. Right now I can choose between a 15 year fixed rate mortgage at 2.375%, or a 30year fixed at 2.75%, or a 5/1 adjustable for 2.75%. Obviously nobody is picking the adjustable rate.
My friends in Geneva tell me that this has been a thing there for a long time. It has some pretty bizarre effects on the market (according to my friends):
1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
3. Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more.
I would be interested to hear from people with more direct experience on how this plays out.
Another potential consequence is that if the price of your house falls more than the down payment you invested, you may be incentivized to simply walk away.
The price could fall for any number of reasons: a market crash and country-wide depression widely impacting many people, or an individual owner who simply did no maintenance/upkeep over a period of years and the property is in disrepair. The disrepair scenario is common among elderly homeowners in the US.
It's not true in all of the US (recourse vs. non-recourse). In all but 12 states, a lender can come after your other assets if the value of your collateral does not satisfy your debt.
Home mortages are recourse loans in all but 12 states (Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington).
Thank you to you and the others responding for the clarification. I guess I just took my California experience and incorrectly assumed it was similar in the rest of the US.
This had a profound effect on house prices in Arizona back in 2009-2010. The Phoenix market, in particular, was flooded with borrowers who walked away when they had negative equity.
No. You have to pay the loan back. You cannot just walk away.
I know several people in Denmark that were “stuck” with the house they were in after the price drops from the 2008 crisis until prices rose above the mortgages again.
You can probably make a deal with the bank somehow at higher interests, but they’ll want there money back.
You can also declare bankruptcy, but that is not simple and not without long term consequences I think.
Many countries don't have the concept of private bankruptcies at all. You may effectively be on the hook for the rest of your life if you really messed up. Don't know about Denmark though.
In Norway, personal bankruptcy requires an application to the debt enforcement office (a local government authority). If the application is accepted, the debtor gives up all their assets and submits to paying all of their earnings towards their debt, for five years. A politically determined subsistence sum is all they get to keep for themselves.
After five years, the agreement ends and the debt is cleared. Each person can only apply once in their life. Any future runaway debts cannot be cleared without the consent of each creditor, which probably won't happen. Unsure how this is done in the rest of Scandinavia.
Yikes. As an American, I would have thought Norway would have a much more lenient form of debt relief based on everything I hear about Scandinavia from our local press. But what you're describing seems incredibly harsh. I wonder if this is why Norwegians tend to be more financially responsible. Only being able to declare bankruptcy once certainly would make people learn their lesson? Is that true? Does it work in practice?
In the US, bankruptcy is often used as an instrument of the wealthy, to escape earlier risky bets. And in some cases, to avoid taxes.
Having such a severe punishment is probably more of a deterrence against risky behavior in the upper 5% of society, rather than a burden on the impoverished.
Without knowing anything about it, I would assume that the politicially-negotiated subsistence amount is probably quite lenient to lower-income folks.
An honest assessment would conclude that our laws are too creditor friendly. They allow lenders to take on more risk than they otherwise would have.
I don't know how our delinquency rates compare to the rest of the world, but there's quite a bit of it. My take is that these laws are due to somewhat unflattering protestant cultural heritage, rather than a deliberate decision to encourage financial responsibility. I struggle to see how the possibility of lifelong debt slavery is moral.
Oh, it wasn't meant to be confrontational towards you. Sorry that that's how it came across. If it ended up sounding a bit harsh, my annoyance was directed towards the legal system.
It's just - I do have a bit of a problem with the underlying morality of this system, and our (Norway's) culture is so homogenous that few locals ever question these things. It's refreshing to share this on a forum where lots of people are curious and have an open mind.
It's not like this is a massive social problem. People who end up in this kind of misery still have a roof over their heads and get to eat and have good healthcare access. But they wouldn't really expect to ever get back on their feet status wise, and that's sad.
> I know several people in Denmark that were “stuck” with the house they were in after the price drops from the 2008 crisis until prices rose above the mortgages again.
My brother was hit too, though I can't recall the exact year.
He ran a small profitable business in the Copenhagen area but was hit badly by the downturn in the economy. He eventually ended up selling at a loss (I think) and moved north with his family so now they also live in Norway.
Disappearance of those "0%" things would already be enough for prices to collapse once they have sufficiently adapted to the 0% situation. I guess the winner is, unsurprisingly, whoever owned the land before.
In asia, generally down payment is very low, and even low interest that could expand up to 30, 40 years to pay back. The home price is usually much lower than western countries with a few exceptions like Hong Kong, Shanghai, etc.
> 2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
Isn't this what is happening right now in the US, that the down-payment is one of the barriers, since less than 10% (forget 20%) down has huge penalties long-term?
In competitive markets, the issue isn't getting the loan - it's getting an offer accepted.
Sellers will heavily favor a cash offer, as it's faster and far more assured of going through. One strategy I've heard about people doing is to take a pile of cash, acquire the property, and then refinance it pulling out 80% of what they put in so that they can both have a mortgage and have a stronger buying position. Add in things like dropping inspection, no contingencies, etc... and it gets really hard for many first time home buyers to compete.
Additionally, coming in with an FHA 3.5% down, vs someone with a traditional 20% down - the sellers will favor the 20% as again it's less paperwork, easier, faster, and more certain to go through if the assessment is off by a few %.
I had no idea about this before trying to buy a property in New England. So much of traditional advice doesn't include these details.
What's weird about it to me is that this is one of the few places in US consumer markets where the seller cares deeply about your method of purchase and where the money came from. Buying a used car? They don't care if it's cash, credit, loan, etc generally. Hell, most car dealers want you to use a loan from them and would prefer that over cash in many ways. When you go to WalMart, they don't deny you buying something for using a credit card vs cash.
> this is one of the few places in US consumer markets
Did you mean geographically? Or temporally? because if the second, I'm pretty sure that is a direct legal consequence of the 2008 housing meltdown that boned both sides of the lending equation.
Even before 2008 it's an issue. I bought in 2008 and cash offers were still preferred over 20% down, which was preferred over less than 20% down. It's because when you make the purchase agreement, the buyer can get a bunch of outs, many of which are based on financing not getting approved. The more difficult your financing situation, the more chance there is of it falling though.
>What's weird about it to me is that this is one of the few places in US consumer markets where the seller cares deeply about your method of purchase and where the money came from.
Often times sellers are trying to buy another home and have put a contingency offer (depending on the market) on another home, so they're heavily incentivized to accept an offer that moves quickly so that they can close sooner. A tiny bit more money may not be worth the risk of having multiple deals fall though, hence all-cash offers and traditional loans being more attractive.
With that context, it's no wonder why sellers care so much about the method of buying.
When I was house shopping almost a decade ago during the latest seller's market frenzy, there were several cases where our offer (needing financing) was by far the highest dollar amount, but we lost out to someone offering less in cash and no contingencies. We put offers out on dozens of houses, and always got beaten by an all-cash buyer. Our agent urged us to consider no contingency offers in order to give us a fighting chance against all the all-cash buyers.
>What's weird about it to me is that this is one of the few places in US consumer markets where the seller cares deeply about your method of purchase and where the money came from.
It's not weird at all. Buying a car or TV from Walmart with a credit card does not carry anywhere near the risk of the transaction failing that buying real estate does.
It's simply a function of the probability of the transaction succeeding (or "closing" as it's commonly referred to). With a loan, there are multiple parties whose requirements need to be met, from the lender, the home insurance, the title insurer, the seller, etc. The more entities you cut out, the less chance of the transaction failing. Underwriting a car is also much more simple and less risky for a lender than a house, which has much higher downside risk and unknowns.
Not to mention the myriad laws resulting in legal liability and opportunity costs relating to real estate purchases, as opposed to a car purchase or a TV purchase where the worst that can happen is the seller takes it back and sells it to someone else.
The financing contingency means that if your financing falls through, you get your earnest money back. Assuming a 500k purchase with 1% earnest money, waiving the financing contingency means that the seller receives at least 5k.
Even with a financing contingency waived, if the buyer has 100k, and their financing falls through, there is no way for them to magically make 400k appear for the sale to happen.
If you are assuming that the buyer has the full purchase price in cash anyways, and are only taking a mortgage because rates are so low, then ya, your point stands (waiving financing contingency along with proof of funds). But lets not pretend that having cash to cover the full price of the property is the common situation.
This 1000%, I sold in March right at the beginning of the pandemic in an incredibly competitive market. The final buyer was determined by the specifics of their offer, not just their final price. FHA with 3.5% down just adds additional risk for closing that 20% conventional doesn't. That risk is minimal, but it's a risk the buyer doesn't have to take.
I'll also add that in competitive markets you also get into a situation where it's a bidding war and you're pushing what the property might appraise for. If you're doing 3.5% down, even though you might be approved up to X, the bank may not be willing to stretch the appraisal for the property. With 10% or 20% down, that's less of a concern.
Also FWIW, for new cars, how you pay does matter. The dealer makes money on the financing, so they will give you a different cash price vs if you go with their financing. The reason being is that they want to sell you a "zero percent" loan that effectively bakes in the interest up front, so their financing will look better, but the final price will be higher.
PMI is usually low-ish. Sometimes as low as 0.25% but up to 2% generally. Largely depends on credit, lender, financial situation. It also goes away once that final 10% is paid off (when the load is 80% principal). It also isn't held against you in the sense that, it impacts your ability to get the loan. It just means you pay more out of pocket per month.
It's definitely not ideal but it's not an overall huge drag.
In the US according to my real-estate agent from 10 years ago it is common to take out a loan for the 20% down-payment so you don't get the long term penalties.
This seemed to completely miss the point of a down-payment, but apparently banks were willing to go with it. They even offered the dual loans as a single product for convenience.
If you work the numbers out it can theoretically save money over the long term vs. renting long enough to save the 20%, especially if it means you can put more money into risky stocks with high returns, but it also increases your risk of financial disaster if the bubble for some reason ever stops inflating, but that never happens as we all know.
Personally I though it was too sketchy and went for a more traditional loan, but I know several people who took loans like that.
Thank god Canada created the CMHC which would insure loans and allow you a down payment as low as 5% for first time buyers.
ironically because the loans where insured they offered lower interest rates on these loans, which meant they costed almost the same as 20% uninsured loans (you paid the insurance premium on-top of your mortgage payment).
even if you have a 20% down it made more sense to put 5% down and put the rest into the index funds or a HISA.
Well, I can't talk about Geneva or Zurich because both cities are very expensive. But generally, prices are going up, the down payment is normally 20% of the price. This is one problem, another one is how they calculate the risk. The "law" is you have to be able to pay the mortgage at 5% and that 5% cannot be more than 1/3 of your income.
So if you buy a 1.25m house and take a 1m mortgage 5% is of that is 50k, so your salary has to be 150k.
Point 3) is wrong, they make still a lot of money with loans, a lot of people still take 10 year loans for somewhere between 0.6% and 1%.
Sadly, it's not always that easy. A large amount of swiss property is owned by pension funds, which are legally limited in their possible investments. So increasing the supply of housing will also defund the pension funds.
I think it's not just that but the fact that the country is literally packed. It's about 2/3 of my country's size,yet has 3 times more people. Haven't been to Switzerland but I can imagine most parks and other public spaces must feel quite full with people.
Its not really helping places like Austin TX. All that happens is the developers move a couple miles further outside of town build a bunch of houses, usually for what works out to be roughly equal to the cheapest house in town. Repeat the process next year. Within a few years everything doubles. So the housing market is inversly priced by distance from downtown and the lakes. Sure you can get a house for $250k, but your likely looking at sitting in your car for 3 hours a day. If you can handle a million $'s you can probably live 10-15 mins away from your work. If you have a few million you might even get a nice place.
Alas, that won't work in Denmark. Any politician threatening to do something that would result in housing prices going down would be voted out of office by angry homeowners and Copenhagian landlords.
Well, there's always that, but I've always figured it's about taxes and government spending. There's a very large amount of over-valued houses in and around the larger cities in Denmark. If the property value goes down, so does the property taxes, which means less income for the local authorities.
There are cheap houses available outside those areas, but getting a loan for them can be tricky since their value is too low and there's no money to be had from lending the money.
Furthermore, most people have their homes as security (not sure if it's the right word in English) for their loans. If the property value drops then many will be forced out of their homes. Also a lot of landlords and real-estate agents, will be out of a job, but that's probably a smaller issue.
5% is more or less the long term average mortgage rate.
Owners generally keep a mortgage on their property (~65% of the property value) to off-set wealth and property taxes. Residences are taxed by their estimated rental values, which is treated as income. Interest payments are tax deductible, while the principal on the mortgage lowers the amount owned for wealth taxes.
The other issue is that most primary mortgages don't allow for early repayment, meaning that the principal either has to be payed off in full or refinanced once the payment period is over. Owners become conditioned to continuously roll over the principal on their primary mortgage.
To answer your question, because the expectation is that residential property will be mortgaged through out the entire ownership period, banks have to make sure that someone who can afford the payment on a 1% mortgage can also afford the payment on a mortgage refinance if and when rates eventually go up.
Canada does something similar. To avoid buyers “biting off more than they can chew” with an ultra-low variable rate mortgage (where the rate might double or triple in 5 years), buyers have to qualify for a LIBOR+5% (I don’t remember the exact formula) mortgage as well.
From what I've seen, prices have been static and have even started to fall in some areas. There are a lot of people staring down a refinance on a 5 or 10 year interest-only loan in the middle of a recession.
I haven't looked it up, but from what I've been told a lot of it also has to do with investment laws for Pillar 2 and 3 retirement accounts (a certain percentage has to go into Swiss assets). Taking 1-1.5% over LIBOR/SARON or whatever the SNB rate is makes sense, but the fall-out in a couple of years if and when rates start to move up again isn't going to be pretty.
>Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more
Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) .
This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets.
Banks usually don't keep the loans. They are sold off quickly for a higher profit.
This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro.
To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments.
This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
I'm not sure if / how this is done in Europe, but do these banks presumably also package these loans for sale, where a potential buyer of the note simply wants the recurring income stream for the next 15 or 30 years? That's the basic scheme here in the US anyway.
I'm having trouble following (maybe it's because I'm thinking in terms of residential loans, and the commercial market works differently or something).
If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee.
If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
Its works the same across the world as everywhere there is fractional reserve banking. The other "Shariah Banking" is also just repackaged fractional reserve banking.
As a Muslim, almost every "Shariah compliant" financing contract I came across is not compatible with Islamic Law (Shariah). Unfortunately, we're just taking modern parasitic and usurious financial contracts, and wrapping them under "Islamic" terms, and selling them as such. Any actual investigation of such contracts reveals that they're nothing but interest and usury in disguise. Islam seriously warns about this sort of behavior.
Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing).
True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt.
Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.
In Islam, there exists a notion of a Salam sale (بيع السلم), or (advance sale). These are sales contracts in which the price is paid for goods to be delivered at a later time.
> The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period."
Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)?
Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.
Yes that sounds like a classic futures contract to me. I'd never heard that usury rules applied to financial contracts before.
Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
Short selling has several issues. Brokers usually charge a fee for the borrowed asset (stock), this fee is clearly usury/interest. Also, it creates risk with the hope of gaining money, without any corresponding value being created. Shorting exposes three parties to the risk of a stock or asset (the shorter, the original owner, and the new owner), compared to a regular trade where risk is transferred from one party to another, and no new risk is created. I found this article[0] that goes into details about the dangers of short selling (see the sections on margins and overshooting specifically). Salam sales do not have those issues.
Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited).
As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled?
Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition:
> The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location.
> Apologies for all the questions this is fascinating
No problem! I'll do my best to answer what I know.
One important thing to note is that Islam also prohibits chaining together permitted contracts, with the intention being trying to circumvent or dance around the prohibition. For example, you and I can engage in the following set of transactions: I can sell you my phone for a certain price in installments (say $120 over 12 months, and $120 is the fair market value). Then, I go back and buy back my phone from you for $100 cash. The net result is that I paid you $100 and you owe me $120 over the course of the year. This is clearly usury, and placing an item in between is just kidding ourselves.
The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
> I'd never heard that usury rules applied to financial contracts before.
Islam prohibits something called Riba. Interest and usury fall under it, but Riba encompasses more than just loans. The example about purchasing gold on credit falls under riba for instance.
>we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on.
These are the very foundations on which modern society is built and which drives the entire humanity forward. Sure, some people have managed to race ahead but on a whole we, as humans, have progressed from clubbing each other for food to arguing anonymously over the internet thanks to all these
With all due respect, this is a very fallacious argument. Just because it is widespread today does not make it acceptable or good in any way or form. It does not mean that it is the cause for our advancement (association fallacy, and correlation vs. causation fallacy).
As a matter of fact, I would wager that these practices are a main driving force of the wage gap we see today, causing instability and unrest, inflation, and tons of other problems. We have better solutions, it's just that no politician I've seen so far is going to dare admit that the modern foundations are corrupt. Very powerful people are not going to be happy (note that I'm not arguing for socialism or communism either, they are destructive in their own ways).
That is a sweeping (and incorrect) generalization.
Except the credit part, all the other things are optional.
And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have.
Just because we inherited a world where these things exist, the tendency to attribute them all to these things is not wise. I don't know what to call this fallacy.
> And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have.
Exactly. It's not needed. It causes a growth at all cost situation we see today (and one cost is debt slavery for a large portion of the population, increasing the wealth gap).
Could you point me to some reading material that establishes that all those were necessary for the forward movement of humanity. Its not a snark, I would be genuinely interested in learning about this point of view.
I have no trouble accepting that these things co-occurred with the movement. I don't have a good reason/foundation to argue that they were necessary, or even beneficial, apart from artifacts that smoothen and/or amortize risks, insurance, for example.
This varies depending on the market but many banks in Europe at least do retain large parts of their loan books, in part because the securitisation market was always and still is less developed here.
Banks can and do routinely turn away higher grade borrowers with no other relationship angle (ie no short or long-term profitable cross-sell) because those loans are unprofitable for them and they can only make money on riskier credits.
More broadly, sub-zero base rates are a real problem for banks and may actually hurt rather than help credit creation (since banks are likely to do less of something which is less profitable).
The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates.
All this does contribute towards the search for yield phase of the credit cycle (CDOs were just a part of that - everyone likes to blame them but they didn't cause the credit cycle which is really a "natural" phenomenon, although they did act to obscure the amount of leverage in the system and thus the likely size of the damage when the bubble burst). Everyone across the board wants to take more risk because they can't make their numbers stack up with the less risky part of the credit spectrum. As a result over the long term some credit becomes mispriced and when there's a wave of defaults credit investors wind up losing money overall then we start the cycle again.
> The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates.
It's been quite some time Switzerland have negative rates and the threshold for charging the customer are getting lower and lower, closer to 100k than to 1B (base fees have also increased as a result of negative interest rates, easier to increase the banking fees than charge negative rates :))
I think these days the US and UK require originating banks to keep part of the loan to avoid the whole "sub prime", "it doesn't matter if it's shit as long as you're not the one holding it" approach.
At least in the US, it's not quite like that. There typically -are- penalties for certain things (i.e. if a loan goes into default or gets paid off via a refinance within X months) as well as regulatory rules and the ever-present GSEs, Fannie and Freddie.
As long as the loan is 'conforming' (which the majority of loans on the up-and-up are) then Fannie or Freddie will guarantee it. Conforming loans must meet a number of criteria (Debt to income, income versus home value, etc.) to have a level of trust that the borrower will repay.
Edit: And yes, if you get caught selling a non-conforming loan to Fannie/Freddie (i.e. underwriting discrepancies) you can get fined and forced to buy back the loan. In fact sometimes they will go on fishing expeditions and companies will have to prove their innocence, almost like an IRS Audit.
There is also the 'servicing' aspect of a loan. Servicers basically collect payments for loans and forward them on to whomever backs the Mortgage. For Fannie/Freddie loans, what this means in case of a default is that the servicer will have to 'front' the money; this is what the housing industry was worried about at the start of COVID: before the guideline changes related to the virus, there were concerns about liquidity in that 'gap' between forbearance and (potential) forclosure.
Depends on the size of the loan, but what you say is true for most. In my personal case I have a “jumbo” loan which is not covered by US government Freddie Mac rules so the bank has to hold the loan on its books. This is pretty common in the Bay Area due to the stupid level cost of housing. In my area the median housing price is $1.785M. From a US tax perspective it made sense for me to take out the largest loan, $1M, because of the interest tax deductions. That, charity and capital loss is pretty much the only tax deductions I have. Not complaining as I understand how lucky I am.
I imagine there is a lack of incentive to take on additional 0% loans unless legally required, due to the repayment becoming a loss for not even covering inflation.
How does the bank make money when it's zero interest loan?
Serious question, the article didn't mention anything about it. I'm sure it still costs a few bucks in fees to get the loan but isn't the interest where the real profit is?
Some banks can borrow some of their funding requirements at negative rates for short periods of time.
Banks fund themselves using a variety of sources - bonds and money market instruments (of various types), equity, deposits, past profits (which is really the same as equity) and various central bank mechanisms. Of those the only ones where there is a decent chance of funding at negative rates are bonds/money markets and central banks.
Bank profits have been squeezed by negative rates precisely because they've been forced to pass on more of the rate reductions to borrowers than they've been able to recapture for themselves.
But modern banks don't stay with a mortgage loan for long periods of time. Thanks to the "miracle" of derivatives, mortgage loans are repackaged and sold to other institutions, so the risk they carry is very small compared to the old times.
Banks wouldn't offer a loan for zero interest if they have to "buy" money for interest. In these type of situations, they are either lending at negative interest rate from the central bank, or they are paying interest to central bank for "safekeeping" (central bank is at negative interest rate) or consumers are keeping money in banks at negative interest rate (less likely).
What makes money for the bank is the difference of interest rate between money they buy and money they sell. Whether one or both are negative or positive doesn't really matter. Relative difference is what matters.
Loans have a cost. If the banks can borrow at negative interest rates they are strictly better borrowing the money and not lending it out compared to a 0% loan. Any profitable plan with a 0% loan in it would in theory be more profitable without the loan.
In econ-101 it doesn't matter what the spread is, it isn't in itself rational to lend at 0%. That is taking on risk with no gain.
There must be some strange contortions in place to make this work. Whatever a "loan" is these days is going to be a totally regulatory construct with little connection to what they used to be way back when.
Pretty sure you don't get to borrow from the central bank unless your product portfolio includes the retail products the central bank or government feels should be available to consumers. So you can't just borrow without serving retail.
So the buyer of the house (seller of the bonds) would have to sell 3.3% extra bonds. And the buyer of the bonds gets a discount.
As for why anyone would buy such bonds:
The system is considered very stable (no US sub-prime mess) so if you have a lot of money, do not want to take risks (stocks and forex) and your bank charges you negative interest, it might make sense.
As for the house prices. Yes they are going up. But you still have to pay back the money in 20 years. Or remortgage, but then it might not be at 0%.
Another thing to consider is that property taxes are based on a public valuation that have some correlation with what you would be paying for a house (valuations is big mess now, but it will probably be fixed in less than 20 years).
> 1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.
But people sell houses based on price, not on the monthly payment. It's possible that high monthly payments reduce the ability to sell a house for a high price, but is this effect that strong?
Absolutely, which is why I said it's mostly irrelevant for the buyer. If the seller purchased in a lower rate environment, they may be in for a tough time. Down payments and equity can soften that blow a bit.
People think of houses in 15/20/30 year loans, so yeah payment is what matters. Few people are fortunate enough to be able to buy their first house with a 15 year loan. Interest rates moving are big drivers on house prices because long loans are greatly impacted by small moves.
Houses are nothing like cars. I haven't had a car payment in many years. I'm still a long ways from never having a house payment.
But it is in fact how the majority of home buyers operate. "Can I afford it" translates into "can I afford the monthly payments", not "can I afford the total purchase price".
I saw this vividly when I bought my first house. It cost $61,000. My mortgage was at 9%. Two years later, mortgage rates had dropped to 7%, and my house was worth 90,000 (state appraised value). If I had bought the exact same house two years later than I did, I would have had the same monthly payment. That stayed constant, and the interest rate change drove a change in total price.
Part of the reason is: What is your alternative? Typically, renting. What's rent? A monthly payment. So if you're looking at a buy vs. rent decision, a big part of the decision is monthly expense of renting vs monthly expense of buying.
I'm sure most of you are well aware, but for anyone reading that isn't aware of the nuance:
> is monthly expense of renting vs monthly expense of buying
Note: "monthly expense of buying" is very different than "monthly cash flow of buying".
The "monthly expense of buying" is the monthly interest paid, taxes, and maintenance.
The "monthly cash flow of buying" is the monthly mortgage paid (principal and interest), taxes, and maintenance.
When deciding to buy a space, you need to use the "monthly cash flow" to ensure you don't default on the loan. When comparing buying vs renting a space, you need to use the "monthly expense".
Yep. That rent you pay is money you'll never get back. At least when buying you have a decent shot of someday recovering the principal (unless you bought at the peak and there's another housing crisis.)
You expect people on HackerNews to not accurately represent how society views something? There's a reason why the phrase "what's my monthly?" is a thing. Car dealers pushing 7 to 8 year loans is because people are worried about their "monthly." Same for rent-to-own places, mobile companies, and everyone else in the lending business.
When I decide to buy a $25k car because that's as much as I'm willing to spend I still need to determine what my "monthly" is. It matters what my monthly is because it is _a loan_ that I need to pay back every month. If I didn't need to think about what the monthly payment was I wouldn't need to take out a loan (unless I guess you got a magical loan that could only be paid off as a lump sum?).
You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.
>You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.
I stopped into a car dealer to look at a vehicle a couple years ago. I liked how it drove, could pay cash, but wasn't opposed to taking out a loan if I could get a better price overall (sometimes possible with fees banks pay to used dealers for getting a loan originated).
In my experience, they brought out a sheet of paper with a range of what the monthly payment would be. I asked about interest rate, and the sales guy had no idea what interest rates the payments equated to - but he could get me an exact payment after doing a hard pull on my credit. They resisted negotiating on the total cost of the vehicle, but were very willing to extend the loan out to make the payment exactly what I wanted/could afford.
I could see it wasn't going anywhere, told them to call me if they get serious about reducing the price, and left. I found a great car on the private market a short time later.
Exact same experience here. The salesman (and his manager, lol) just couldn't grok that I don't care a shred about what monthly payment they can math their way into. I'm looking at the total price of the car. It was like we were speaking totally different languages. Even after I tried to explain it with "Let's assume I'm going to pay cash..." they kept trying to steer me into their finance department. Obviously they make more money on the financing than they do selling the car itself. I basically won't go to a dealership anymore.
I did my house shopping the same way. For some reason realtors are a lot better about negotiating the actual sale price than car dealers are. I never really had a realtor try the "So, tell me about your maximum monthly payment!" pitch on me, probably because you're expected to have your financing lined up before you shop.
If you're going in to buy something with a "max monthly I'm willing to pay" in mind, you are setting yourself up for a really bad deal.
My wife and I always pay cash for cars. The last time we bought one, they looked at us like we were very weird for...well, having the cash to pay for a car.
Then again, we basically didn't go to a dealership other than for test drives. We e-mailed every dealer within an hour and a half of us with "This is exactly the make and model we want, these are the options, this is the color (but we're open to substitutions), what's your best price?" We took the lowest bid, and if there was any funny business (there was with one), we walked.
Most dealers now have online sales departments that are setup for these low-overhead but low-price transactions (this was a rarity when I bought mine in 2009). Apparently the sales guy we bought from sells 3x more cars than the next-best sales guy at the dealership, because he knows how to price the cars to move online and then acts straight & efficient when the buyer comes in.
A family member bought a very nice, decked out, brand new truck. He could pay cash, no issue. They gave him many thousands of dollars of discounts for financing it if he promised to keep the loan for 3 payments (or their fee from the bank would get clawed back).
He held up his end of the deal, paying 18% interest on a massive truck loan for 3 months.
The sad thing is many people would do the same thing without the ability to pay it off in full. At that interest rate and a ~7-10 year loan term, you'll be upside down on the vehicle until the very end of the loan. And most people wouldn't keep the vehicle that long because something else changes in their life...or they just want a newer vehicle.
I have a friend on FB who said he did the same thing, minus the verbal agreement, and made sure the loan didn't have a pre-payment penalty. He then paid it immediately, which I assume led to a strong talking-to for the employee that authorized that sale.
You can usually get a significant discount, usually to the point where the dealer loses money on the sale of you're willing to finance. In specific the finance kickback on a new car can be $2-3k+. Just make sure the financing doesn't have a prepayment penalty.
I was able to avoid this by buying from Carmax, where they really didn’t seem to care that I wanted to pay cash. They offered financing but didn’t push after I asked about the interest rate and declined. They also took a personal check (rather than requiring a cashier’s).
Even if you can afford to pay it in full, if you have a cheap loan available where the interest payment is less than the after-tax interest you would otherwise accrue on it (as an investment of some sort) then overall you might come ahead on the deal by taking the loan. This may be true even if you don’t invest it per se but use it to pay off debt at a higher interest rate. Since a car loan is secured against the car itself often it will have a lower interest rate than credit cards for example.
Car loans are 0% for anyone with good credit right now. We live in a managed economy now sadly, so you are actually throwing away money by paying outright instead of taking on interest-free debt and doing almost anything else with the theoretical reserve-principle; even sticking it in a checking account is going to be a net gain.
When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.
That's what I did, and as such I agree, but just be aware that you might very well end up paying more overall that way (assuming you're buying a new car from a dealer).
The point is the total loan amount is mostly irrelevant if the term is flexible. It used to be that 6 or 7 year car loans were basically unheard of... 3 or 4 years was the norm.
Another example is most people never pay off their mortgage. Some refinance, often several times, resetting the term. Eventually they'll sell the house, pay off the mortgage as part of that transaction, and keep the change (if they're lucky.)
One of the biggest financial issues facing this and other countries is people are conditioned to base affordability on the monthly payment. From cars and homes to every day subscription type services like Netflix to your cell bill.
Salesmen, well auto sales, are trained on the four square method to get you to buy. You could attribute the mortgage crisis a decade back as falling into this situation.
The barrier to buying a home used to be the down payment but creative financing is what got a lot of people in over their heads. It all about that cost per month.
Now people who over reach tend to forget all the other costs that come with auto and home ownership, namely insurance but owning a home has long term costs too.
I wonder whether the ability to discern description and justification is correlated with other abilities. I suspect it is, but if anyone is aware of studies I'd be interested.
An important difference is that cars are a purchase with an expected eventual value of close to zero where as houses are typically seen as an investment with a goal of being to eventually sell it for more than you paid for it.
This means that car payments are more of a cost of ownership and house payments are more of a reoccurring investment.
As long as the house is actually a good investment, being able to afford the down and monthly payments is the most important thing. Rather than spending vs saving/investing, the trade-off becomes more of investing in real estate vs investing in something else.
Most of a car's price is decided by its company before it's even assembled. If I'm buying a car with cash it's irrelevant how other people pay.
House prices are defined by demand. If your uncle wants to buy a house with a 40 year mortgage of half his salary, then I'll have to pay more to match it.
Assume a 30 year fixed mortgage. Say the buyer pays $1 million total, the interest rate determines the purchase price. But why do you care? Either the seller or the lender will get the money.
> This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future.
They can stay high or low for quite a long time...
It certainly would be, though it seems the Fed is committed to keeping rates low in perpetuity.
It's possible we hit a point where inflation ticks up due to recent stimulus/printing, and the Fed is forced to raise rates suddenly. The recent change to allow inflation to run past 2% indicates they're likely to let it run for a bit, though.
Depends on your job. Professional/managerial salaries often lead inflation - if you're a financier, engineer, consutant, or CEO you've been raking it in over the last decade. Public servants, service & factory workers, and other commodity jobs lag inflation.
My mom was a teacher and said that when she graduated in college (late 60s), teacher salaries were maybe 20-30% below engineer/lawyer/professor salaries. By the time I was born (early 80s) her classmates in those professions were making 3x what she was.
Inflation-adjusted housing prices went down about 20%. Nominal home prices basically stayed constant for about 2 years, then resumed marching upwards.
Also note that the actual bloodbath happened from 2006-2012 (when the housing crash took prices down about 35%). It does not correspond to any major increase in interest rates. The primary driver seems to be foreclosures, which in turn was driven by ARMs and poor lending standards. Conclusion might be that interest rates just don't matter that much as long as a majority of people are on fixed-rate mortgages, while they can matter a lot if folks are on ARMs they can't afford. (Interestingly, we may get a similar crash of multi-family housing in the near future, since all the tenants not paying rent now is having a similar effect on mortgages.)
Here in the U. S., specifically WA state, the shorter the mortgage, the lower the interest rate. For example, when we refinanced we could get 15 years @ 2.5% or 30 years @ 3%. In that case, the "low interest mortgage" was the 15 year mortgage.
So either one of us has some miscommunication, or things are different where you live.
> The price alone is mostly irrelevant for the buyer.
The price is certainly relevant when it comes time to sell, and a high price due to low interest rates leaves you more vulnerable to price shocks in the event rates need to rise.
Of course we haven't seen any major price depreciation due to rate increases in the last few decades :)
Sure, but the point is the buyer only looks at the price as a function of the payment they can afford. If the buyer can afford 2k/month they don't really care which part moves. Rates or price? If that means high rates and lower price? Fine. Low rates and higher price? Fine, but carries more risk as you (and I pointed out).
Certainly true. Though higher price with lower rates, assuming monthly payment is the same, can be beneficial as a larger percentage of your payment goes towards principal. That only holds as a positive if price doesn't drop due to interest rate increases.
But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
It really depends. If you want to pay 100% cash for a home then yes, high interest rates are the best time to buy. But with interest rates currently below market returns, you're maybe best off borrowing 80% and using your remaining cash for a diversified portfolio of liquid investments that will likely outperform your APR long term.
If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.
Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.
So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.
Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.
If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.
> But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
Don't forget the tail risks of inflation.
The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.
You seem very knowledgeable on the market trends. What do you think the effects of COVID-19 will have on the market, given unemployment broke records and all that?
If you can count on stable employment for the next 20 years, you can make a plan like that. Otherwise your fallback might be to sell the house before it's paid off.
From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.
In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.
We did a little bit in the 90s when interest rates increased, and I think the rate increase in the late 2000s was responsible for at least some of the drop in home values, although how much was obscured by the housing bubble, and low interest really acted like a multiplier there.
But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.
Yeah we had a long-term plan to buy a house this summer and we stuck to our plan but it's definitely scary thinking about what will happen when interest rates rise, if we ever wanted to sell. I guess the counterpoint is that the whole market should move in lockstep, so if rates go up and the price of your house goes down, at least the rest of the market should be affected equally.
It kills any idea of getting a real return on your house but frankly that was not a real thing through most of history anyway.
Yeah, the real return is the equity. The house can act as a small savings account over time. But even that is questionable unless you're prepared to move out at some point, which means transaction costs and buying something new.
IMO, for primary residences you did the right thing (if you want a house of course).
I've come to terms with the fact that in most markets a home is not the best way to use your money in terms of return. However, you get to live in it and that's priceless. And like you said, it acts as a savings account over time and that generally works out as people will eventually downgrade after their kids have left.
Another nice thing about owning a home is you can improve it (additions, adding bathrooms, etc) and certain additions more or less pay for themselves in terms of "getting your money back" over enough time. Again, probably not going to outperform the market, but you get to live in it. So even if the market tanks for a few years, I still get the benefits of whatever I've invested in my home.
The trick is to not overspend on a home. Too many people use all their savings to make a downpayment and then use too much of their income to pay for it. This can not only get you in trouble but also puts you at a serious disadvantage in terms of accumulating wealth.
The point of most things that you can buy should be the thing itself, not its investment-value. If not there is probably rent-seeking going on, i.e. a market failure.
All things degrade due to entropy. Things cannot truly become more valuable by themselves.
I think raw land is one thing that can become valuable on its own. Of course billions of years from now it will be gone.
Where I live the land is very much a big part of the cost of the home. The structure is worth what it would cost to demolish plus rebuild it minus existing wear and tear/needed repairs I figure. The value of the structure doesn’t appreciate as fast as the land it is on due to degradations as you’ve pointed out and materials/labor usually not increasing as fast as appreciating assets which the land itself is. Of course in many locations the structure is worth more than the land it is on.
Hence location being the most important part of the equation as any real estate agent will tell you.
The land doesn’t become “valuable on its own”, it’s just used to extract value from other things.
> In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
> ...
> As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.
Your local area matters a lot too. Is your city gaining or losing population? Is there new development adding units onto the market, or have NIMBYs locked it up? Do local tax laws incentivize long term owners over short term owner? All of these can have an effect that'll blow interest rates out of the water.
Some places a starter apartment is $25000, and you can work remotely as a developer earning, say, $4000 a month net. It's just hard to wrap my head around 20 year mortgage.
This has been the case in Australia for decades now. Average house price is AUD$1M. Standard deposit is 20%.
Government has just allowed first home buyers to get a mortgage on a 5% deposit. While that sounds great, it's obviously just encouraging more debt to flood the market and drive up prices.
And of course the government doesn't give a shit about housing affordability. The standard practice here is to get at least two mortgages: one for the house you want to live in, and one for an investment property that you'll eventually sell to pay off your other mortgage.
Sounds stupid right? Well, not when the government gives massive tax benefit handouts to property investors:
1. 50% capital gains tax discount.
2. Negative gearing: basically the losses on your investment property can be claimed as a tax offset against your other income.
> My friends in Geneva tell me that this has been a thing there for a long time. It has some pretty bizarre effects on the market (according to my friends):
One important difference between Geneva and Denmark though - Genevas extremely expensive housing market (in both purchase and rent prices) is driven by its geographical location. It's surrounded by mountains on most sides and sitting on a lake. This means there's pretty much no space to build more buildings to accommodate the influx of people moving there to work in science and politics.
Geneva building prices were skyrocketing without those loans just because there was no way to build more.
Switzerland also has the highest level of household debt (which includes mortgages) in the world. Lending volume and price usually have a fairly linear correlation.
The volume tied to mortgages is high compared to other countries because you can essentially keep 2/3rd of the debt forever, and even more if you indirectly amortize through your pension fund.
Typically speaking home prices tend to fluctuate based on interest rates, because home buyers actually purchase based on what they can afford on a monthly basis, not what the actual list price of the house is. I imagine at such low rates, the effect must be pretty strong though.
Sheeesh. Bad news for entrepreneurship. As due to mortgage lending rules, it’s very difficult to get a loan as a business owner rather than an employee with steady, bankable, salary
It's also bad news for consumers because they cannot finance consumption with mortgages. You're never going to see consumer inflation if you're giving money to everyone except the consumers.
Corporate bonds are also at a record low, even so much that there’s talk of an increasing rate of zombie companies that just stay alive because of loaned money and will collapse as soon as interest rates will go up again.
It's not bad news. Because interest is parasitic (it's prohibited in Islam, Judaism, and Christianity), there are other (fair) ways to become an entrepreneur. Pitch your idea to an investor (or group of investors), and have them put money into your company. If it succeeds, everyone profits, if it doesn't, you're not left with crippling usurious debt.
They charge fees to issue mortgages. The 0% rate is not actually 0%. It's probably more like 0.25-1% and the bank is making up the difference through the fees.
The Danish mortgage market is really strange. In practice the people buying property issues bonds in the private bond market (although in most cases it does go through an issuing bank).
So if an investor has no other opportunity than 0% for their cash it's a "good place". Many banks in Europe has negative rates on deposits so it might be the better alternative for some.
But there are no banking in a traditional way involved here where they have a product and lend to 0%.
Denmark has had negative interest rates in the past (though typically for 10 years), so there's that hedge for starters, but there's also fees & gov subsidy/lending incentives/enforcement
It's in fact more profitable to lend at 0%, because of negative interest at the central banks, negative interest for government bonds and even negative interest for certain corporate bonds. Combined with the immense cost of hoarding massive amounts of physical cash, there aren't many options left.
While a corporate bond can go sour and a government bond may well be legally wiped out, a mortgage is at least collateralized with the property. Assuming that that the negative interest rate regime continues - which it most likely will - property prices will be driven up even further. Even if the mortgage goes into default, the repossessed property may end up being worth even more at that point.
Do Danes get tax deductions on mortgage interest? One of the best tax deductions we get is the one on mortgage interest.
Also this isn't really that great since lower interest means higher home prices. I'd rather have high interest and low home prices if I were a buyer and try to pay if off ASAP or refinance to lower interest when the rate drops. Buy when interest is high and home prices low and sell when interest is low and home prices is high.
Renters are living in housing which is itself eligible for business loan deductions. If you believe that landlords use the cost of holding real estate as an input that shapes the supply side of the supply-demand balance in the broad rental market (as I do), then it seems that renters do indirectly benefit from the deductibility of the loans on the buildings in which they live.
The mortgage interest deduction serves to put the purchasers of owner-occupied real estate onto a more equal footing with commercially-rented real estate. That seems like a valid public policy purpose, even though the mortgage interested deduction became substantially less valuable with TCJA-2017.
But it keeps renters renters. I'd rather forego my tax deduction for owning my apartment and bake it into the normal tax. I feel it's unfair a friend can pay the same amount as me each month, but instead of paying down a loan he loses everything to a landlord. And in addition I also get to deduct the ~rents~ interest.
Lets say I pay $2000 each month in mortgage. Some of that is interest that I get to deduct on my taxes. So in practice I pay maybe $1700/month, and most of that is really me saving by building equity in my apartment.
Before I bought the apartment, however, I paid more than that in rent. And all that was money going to someone else. If anyone deserves a tax break, it's those not privileged enough to yet own their own home.
Edit: sorry, in my language "rente" is "interest", so I mixed them up and meant to say I get to deduct the interest part of my mortgage payment in my previous post. Probably where the confusion stems from.
> One of the best tax deductions we get is the one on mortgage interest.
Not anymore. The rise in the standard deduction combined with caps on SALT deductions has drastically curbed the value of mortgage tax deductions. As a result, the number of people in the bottom 90% of income who itemize their taxes has fallen precipitously.
From your link the only real change that the law made was to reduce the deduction of interest from a loan cap of $1 million to $750k. The SALT limit of $10k hurt a lot of people, but the mortgage deduction is not part of the $10k SALT (state and local tax) limit.
Danes can deduct around 25% of paid interests (and "contribution fees" on mortgages). A little more for paid interests below DKK 50000 yearly and a little less for paid interests above DKK 50000.
A typical home can sell for DKK 4M. With a 20 year 0% interest and 80% of the 4M mortgaged (the maximum allowed), the "contribution fee" would be set at 0,75%.
That would amount to interests (0%) and "contribution fee" (0.75%) yearly around DKK 24000 (1st year) of which 25% = DKK 6000 will be deductible.
To put that into perspective:
A. An average "medium level" worker will have an average income of DKK 466,660/year[1] and pay DKK 159,212 in taxes, leaving a post-taxes income of DKK 307,448.
B. An unemployed will receive DKK 225,894/year and pay DKK 58,952 in taxes, leaving a post-taxes income of DKK 166.942
So in reality the mortgage tax deduction does not amount to much. With those low interest rates it is around DKK 6000 or DKK 500/month for a typical family.
Compare DKK 6000/year or DKK 500/month to:
- a pair of Levi's: DKK 660
- a 4G/5G plan with 50GB/month: DKK 160/month
- iPhone 12: DKK 7000
There's a property tax of 1% for home values up to around DKK 3M, and 3% for the value above 3M.
That is the based on the "official estimated value", however, which is typically conservative and lagging and therefore somewhat less (like e.g. 60%) of what the property actually sells for.
The 3M is set so that the vast majority of homes will not exceed this value.
In addition to that we pay a "lot tax" which varies by municipality between 1.6% -3.4% of the value of the lot without the buildings.
But one forgets that even though the interest rate is 0% the COST of the loan is !=0, we still have to pay a "bidragsssats" which is an "administrative fee" to have the loan
The interesting part is that that this rate can be changed over time to whatever the lone-shark wants it to be, thus - as always - you need to look at the TCO.
ÅOP as it is in danish: "Årlig Omkostning i Procent" - aka the Yearly cost in percent...
Yeah, that's what I figured. Which I why I was pleasantly surprised to learn (at least according to an HNer in the know) that, in the UK at least, rates must be expressed in a way that accounts for all fees -- so something like this couldn't be called 0%.
I'm curious why this hasn't been competed away. Short-term rates in Denmark are -0.6%. Couldn't banks just borrow short, write mortgages at 0% and pocket 60 basis points?
It's a little screwy, because you're getting paid the lenders instead of the borrowers. But it's still fundamentally no different than a bank that borrows at 2.5% and writes mortgages at 3% APR.
It's very different, because it means you don't need the borrower to ever pay back. Meaning the banks will give loans to anyone the laws can be bent to allow lending to.
The customer can't default if there is no interest, so just let the debt remain on the books forever. Well, I suppose you could take a loss if your customer dies, and the estate is insolvent.
If you're not making the monthly payments then that's still a default. I don't see how the interest changes anything.
I guess you could argue if the bank is not paying interest on that money, then they won't lose anything if the client is in default. I think there's probably still opportunity costs to the bank in that case - they could be loaning that money to a client that pays additional fees and makes the payments on time. But I imagine they would still foreclose and sell the asset to recover the principal in that case. Which might turn a profit for them.
There are two types of rates that are negative: the central bank deposit rate, and the government bond rate. Neither means that commercial banks can borrow at negative rates.
The 'bidragssats' on my mortgage is currently at 0.7160%. This is a 15 year mortgage at 1% interest so effect rate is 1.71%.
If I was to refinance to a 30 year mortgage with the same bank/mortgage lender this quarter I would get a 0.5% mortgage with 'bidragssats' at 0.6812% so around 1.18% effective rate. This would also increase my principal by ~30000 DKK or around $5000.
> Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs.
This is like a Canadian getting a 3.0% loan in USD to buy a house, then having the Canadian government fix the Canadian dollar such that it appreciate 3.0% pa against the USD. It's effectively a 0% loan, but due to obscure technicalities.
It seems, the lender still earns interest, it's just that the interest is covered by the variance in exchange rates between currencies. So your DKK1000 mortgage payment is worth €1030 after the first year, €1091 the next, etc.
The actual interest rate is -0.75%. If they are offering 0% mortgages, the bank is taking 0.75%.
From your point of view as the buyer. You basically are being given an amount of free money to on the books take an amount of debt.
The thing about negative rates, it's effectively society is saying 'do anything so long as it's not risky.' even if it doesnt make sense.
It makes sense, tons of money is moving more conservative. Boomers are headed into retirement and need to move their money to safety. Except where are they investing it safely? In those bonds that are negative. They are losing money in their investment.
There's also the reality that the boomers have not saved enough in their generation. Many of them are expecting underfunded social programs are going to keep them afloat. That's not going to happen. In many places those retired cant make ends meet and therefore you get silver crime. https://www.telegraph.co.uk/news/2017/11/20/poverty-ageing-j...
So the boomers will raise the money to retire by inflating housing values and the younger generations buy this debt theoretically when they move into those bigger homes. That's not how it will work. It will inevitable result in exactly the same interest rates and inflation like the 70s and 80s during the WW1 boomers.
There is a more basic economic question that I am curious about.
I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.
The reason I think is that interest/mortgage/etc rates just reflect how much people/banks/etc are willing to receive in profit for parking or lending their money somewhere. This has gone to 0% (almost no profit) because no one can offer good returns on the money. Or the people receiving the money have so many choices that the lenders are forced to compete to 0%. All the VC money sloshing around for free is because there is no more favorable place for that money to find profit and the 1-in-10 (?) shot that startups have is still better odds than average other opportunities.
Right now it seems there is too much money searching for returns. And that money is not somehow just going to disappear over time.
To take the opposite hypothetical, if you consider the accumulated wealth of all countries now, and the relatively low growth of most of them, how could it be possible that all that money could find good investment return rates? Except for isolated pockets of growth, need for investment, where will we find broad returns anything greater than a few %?
So, until something fundamental about the money supply changes, are we in for a long period of pretty much 0% returns?
I would love to know some more sophisticated ways to understand the situation.
We are in uncharted economic waters, and we have been for about 12 years. Not only is there 0% (or lower!) interest rates, we also have QE (central banks buying government assets directly), we have central banks buying corporate debt now!
This is creating market bubbles. Worthless tech stocks is one place. Housing prices have soared. Whatever might happen might happen quickly.
> I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.
Yes, 17-20% interest rate was not unusual in 70s, 80s, but home prices were much much lower back.
Inflation adjusted, median price in 1980 was 180k, it peaked up to 280k in 2007, then dropped back down to 190k by 2011, and has now risen back to 280k in 2020. Feels like a correction is due, but if rates stay so low, who knows.
If you think the overall market is one where supply of housing and/or land is constrained, it might be more relevant to adjust for earnings growth, not just inflation.
Alternatively, if you think for the market as a whole there are not meaningful constraints on supply of housing or land, the more relevant adjustment might be for increases in construction costs.
I reckon housing prices would be lower now too if interest rates were at that level. Most people care about what their monthly payment is going to be. If they're paying 20% interest the principal is going to have to be low enough to accommodate their budget. Increase rates and watch demand dry up as the monthly cost skyrockets for those financing the purchase. Prices should drop accordingly.
I was interested in how it was possible so did a quick Excel calculation of monthly payment.
For a 100 000 USD home without a down payment, and a 10 year loan you'd pay 1738 USD per month for a total of 208 500 USD. I've used 17% yearly interest rate.
=PMT(0,17/12;10*12;100000)
Today if you used 3% interest rate, your monthly payment would be 965 USD for a total of 116 000 USD.
Buying homes on loans was insanely expensive in 70s-80s but probably the growth of prices of homes made up for it.
Ah so the problem is that the supply of houses is very limited and prices are dictated by amount average house buyer for specific house can afford. It makes sense.
This is another proof why government shouldn't intervene into the market by offering loans or subsidies. Usually what they end up doing is completely opposite of the intention. Instead of subsidizing young buyers to buy homes for less cost, they end up subsidizing the owners of the houses.
> Right now it seems there is too much money searching for returns.
Or too little returns available for all the money. This is the expected end-game for a well developed society, where people have most of what they need so extra capital can't move the needle anymore...
What is kinda good. The problem happens where not everybody is included on that "well developed society" and the excluded people don't make a difference because they get too little money to participate.
In Denmark's case, the rates are set to defend the krone's peg against the euro. Denmark being above average in terms of stability within the euro zone sets negative rates to shoo people from parking their money there, which would otherwise drive demand and increase the exchange rate for the krone.
In Europe as a whole, yes, it is in deep stagnation. There is no where near enough investment opportunity for the wealth within the block, and this is made doubly worse by the governments subsidising all investment, essentially eating half the investment opportunity (while simultaneously creating a beaurocratic nightmare which also needs to be paid for). All the remaining wealth just piles into any old unproductive asset which can out perform the -0.6% bank rate.
If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.
> If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.
I have read about that, and it was worth a good laugh and a "what's the world coming to" kind of head shake. Mind boggling.
>> If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.
Hahaha, so as the governments the world over propagandize (read black money/corruption) people to move to digital cash
the banks are legally allowed to hold mountains of them.
And ...even charge people a fee to withdraw there own money as cash.
> And that money is not somehow just going to disappear over time.
It almost did, in 2008. Something like $3 Trillion evaporated in a very few months. To prevent a disaster that hurt a huge chunk of people, the Fed injected $3 Trillion back into the economy. The Fed was starting to draw that back down, but the economy got jittery, and then Covid happened.
We have the problem (too much money) because the price of fixing it was too high (short-term catastrophe).
There is an important point missing. The bank can always lend for a better interest than it gives to its customers. In these cases, they lend for a negative interest rate! Thus the customer pays 0% but the bank still makes money on the loan from for example a government bond of -1% that it is linked to.
Before the financial crisis of 2008 you could get those in the UK. I had one just as the fan got hit by something back then. 25 years, 0%, no deposit. They were quite common. It was so good I didn't remortgage for 10 years until we sold and moved.
Dane here. A piece is missing. Interest rates may be 0%, but there is also an annual bank fee on the loans. As the interest rates have gone down, these fees have risen, and I believe the banks increasingly make their money on those. It's still good news for borrower, since the fees don't accrue interest.
You probably have a term "Effective interest rate" which takes into account various fees and interest rate. It was designed to counter this type of practices by banks where they would offer lower interest rate but higher fees which were less visible to the consumer.
When interest rates are as low as they have been now for a long while (sub 2% for homes), the interest rate portion isn’t the limiting factor for how much you can afford to borrow.
Instead, to prevent prices going to infinity, there is usually some kind of laws in place for maximum length such as 30, 50 or 100 years (infinite I.e interest-only was common at least in Sweden when rates were higher), a minimum down payment such as 15%, a maximum size of the mortgage relative to the income etc.
Sweden now has all of these (!) so for most buyers, whether the interest is 0.5 or 3.5 makes very little difference. Most buyers, especially first time buyers, will be capped by one of the other limits regardless.
As it has been pointed out, this loan isn’t 0% since it’s not the effective interest rate including fees that is 0%.
This effect has also resulted in the people of Denmark becoming the most indebted households on the planet [1], which is increasingly a common theme among such low rate borrowing nations. Norway and the Netherlands are two of the other most indebted household nations. So the real cost is far beyond the low interest monthly payments, it ends up becoming a society-level risk of economic debt suffocation as people load themselves with ever greater amounts of housing obligation, and it sets the stage for a hyper regressive society where housing is far too expensive and you have to bury yourself in debt to buy in. 0% mortgages are cheered, while the staggering monthly payments caused by the asset-inflationary nature of those 0% rates is ignored (resulting in eg Denmark becoming buried in household debt their incomes barely support).
In NL, some banks issued mortgages with interest percentages linked to Euribor interest rates (like +0.5% on 3-month Euribor rate). Once the Euribor dropped below -0.5%, the banks actually had to pay out the interest difference (if there weren’t other bank charges added)... Some people, but likely to be just hundreds of customers, not much more, actually have a mortgage (with ING and Rabobank) for which they receive money at this moment.
The same mortgage product cannot be bought anymore...
The key term here is Danes, not residents of Denmark, but individuals who are born or naturalized Danes, even many of the naturalized ones do not get the same rates. By default Danes get ~5% downpayment where none Danes get ~40%.... yay
Here in the UK some people had mortgages that were "x% below base rate". When the 2008 crash happened, rares fell to 0 or 0.25% and they were paid by their lender for the privilege of having borrowed.
Bought an apartment in Germany this year. My effective interest rate is 0.74% fixed 20 years with a downpayment of 40%. The bank guy said the bank will make no money on this loan. They do it anyway because they want the object in the portfolio.
Inflation in the housing market has been tremendous in the last years in germany.
> The bank guy said the bank will make no money on this loan.
Ha, I believe that the guy told you that, I don't believe he is correct. :) The bank is not a non-profit and is totally making money on that mortgage. A considerable margin in fact, given how much effort goes into it.
The article does not say anything about the price of the bonds. So it is kind of useless information. For example if it is 0.94 it may be worse than a 0.5 coupon bond with a higher price.
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[ 2.9 ms ] story [ 287 ms ] threadhttps://blog.nord.investments/hvordan-undgar-du-de-negative-...
On the other hand, 0% has no known special relationship with the housing market, so there's not really a good reason to expect substantially different behavior at that value compared to -.125% or +.125%.
For example - if I have a 20 year mortgage on a $240,000 house @ 0%, I have to pay $1,000/month. If the interest rate is -1% then I have to pay ~$900/month. I don't know if that extra $100/month really moves the market on home prices that much.
At the very least that increases demand for housing dramatically
What does this mean? I am at a loss.
With negative rates the payments compound. If the interest rate is $900/month, you're paying off $1000/month in principal each month, and making $100/month in profit that is applied to the home equity. You can then go use that equity to take out another loan on the property, make $100/month in profit, repeat. Or go buy a different property with a different lender, if the bank starts getting suspicious. If you can't afford the increased payments...well, that's what a loan is for, particularly one that you're making a profit off. ;-)
a -1% rate on a mortgage with 20% down payment is effetely a 4% annual return on investment.
If you can make 10%/yr in the stock market. and your mortgage is 3%/yr you should be maxing out the loan already and putting your cash back into stocks to make the 7% difference, not another house, if mortgages are 0%, you are making 10%, If mortgages are -1% you are making 11%, ect
The downsides to this strategy in a negative interest rate scenario are the same as they are today: If all your capital is locked up in down payments, you are missing out on stock gains entirely. If all your capital is in the market, you are vulnerable to bubbles and swings there.
Same thing with bonds, mortgages, and loans: there's default risk.
Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you.
(It's also worth noting that there are a few risk-free assets that offer yields higher than 0%: U.S. Treasuries, and U.S. savings accounts. And there is a predictable carry trade of firms borrowing at 0 in the EU, converting their Euros to dollars, and then depositing in the U.S. at > 0. The risk then becomes currency risk, the chance that the dollar will depreciate, which is also happening.)
I don't think this is accurate, as there is still risk because we are talking about a mortgage, not just a negative interest loan. A mortgage comes with down payment and a house for collateral. You can end up underwater on an interest free home mortgage just as easy as one with a positive mortgage. The only difference is your monthly payment is lower without mortgage interest.
Also, if you default on the mortgage, you are also out your 20% down payment.
The part I find interesting about the current situation is that stocks are sky high going higher, but loan interest is low. This indicates to me that banks and institutions are desperate to park money anywhere but the stock market despite the incredible market performance.
https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-y...
Homeowners view this as a zero-sum game. If the 33% of non-homeowners are losing (and they definitely are), than the 67% of homeowners feel they must be winning (even though, arguably, the majority of them aren't).
I agree with your logic - it seemingly would make sense.
In actuality, though, I also pay a 0.5% "contribution" fee which covers mortgage company administration and collective risk. So the effective rate is around 0.22%.
For the 20y bonds the 0% interest is also just the actual bond rate. The administration fee will have to be added.
The "contribution" fee rate depends on how much of the home value has been mortgaged. Below 60% it is typically around 0.5% because of the relatively low risk (you can probably always auction off the house at get at least 60% even in bad times). When mortgaged from 60 to 80% of the home value the fee is higher.
At this point I don't know what the point of the loan is anymore. Is there really any realistic intention to ever pay it off? Every single time I thought I had timed the bottom, but rates continue to drop.
Now, I'm refinancing again, but I'm paying some money. All in all, my net refinancing costs will be around $2000, but I have halved my interest rate almost, and will now be able to pay my home off about 10-15 years earlier (we just bought two years ago).
"Neither a borrower nor a lender be / For loan oft loses both itself and friend." -- Polonius, from Hamlet
(As a side note, this is an important and often-overlooked point about mass surveillance. There's a huge difference between large data-hoovering organizations knowing about you and large organizations caring about you. Most people's best defense against identity theft or blackmail isn't cybersecurity, it's boringness, and the law of large numbers.)
They don't make up for the loss, they accept the lower rate of return vs losing the customer entirely.
The customer therefore has no leverage over the lender by threatening to take the loan elsewhere. They'd have to pay all of the remaining interest if they wanted to settle the loan, or at best settle the interest difference if moving the loan to a lender with a different interest rate. Assuming both banks agreed to the exchange.
Of course, if interest rates increase, such settlement could also favor the borrower. But that hasn't been the case in a long time.
Most mortgages here are floating-rate.
Is this better in USA?
Edit: Better.com is actually listing 2.0% rates but with $9,100 in points, based on my property and location in CA.
Also, the rates have gone up since then, I keep getting Zillow alerts about it.
You'll need a salary or other reliable income sources in the EU member state where you're buying, banks there won't offer you a mortgage. Never mind you're earning 5 times the bank employee's salary, just in another member state.
You'll need free and clear ownership of a home in the EU member state where you're earning, or banks there won't offer you a mortgage for your home in another EU member state. You'll only get the loan by mortgaging the property local to the bank, not the actual property you're buying.
Some limited exceptions exist for popular holiday countries, but banks will make you pay for that "privilege".
1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
3. Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more.
I would be interested to hear from people with more direct experience on how this plays out.
The price could fall for any number of reasons: a market crash and country-wide depression widely impacting many people, or an individual owner who simply did no maintenance/upkeep over a period of years and the property is in disrepair. The disrepair scenario is common among elderly homeowners in the US.
https://www.financialsamurai.com/non-recourse-states-walk-aw...
Home mortages are recourse loans in all but 12 states (Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington).
I know several people in Denmark that were “stuck” with the house they were in after the price drops from the 2008 crisis until prices rose above the mortgages again.
You can probably make a deal with the bank somehow at higher interests, but they’ll want there money back.
You can also declare bankruptcy, but that is not simple and not without long term consequences I think.
You can ask a court to declare you bankrupt, but there are many requirements and rules. And the court may reject your application.
After five years, the agreement ends and the debt is cleared. Each person can only apply once in their life. Any future runaway debts cannot be cleared without the consent of each creditor, which probably won't happen. Unsure how this is done in the rest of Scandinavia.
Having such a severe punishment is probably more of a deterrence against risky behavior in the upper 5% of society, rather than a burden on the impoverished.
Without knowing anything about it, I would assume that the politicially-negotiated subsistence amount is probably quite lenient to lower-income folks.
> Norwegians tend to be more financially responsible
I'd say that's being responsible, period. A lot of Americans aren't
I don't know how our delinquency rates compare to the rest of the world, but there's quite a bit of it. My take is that these laws are due to somewhat unflattering protestant cultural heritage, rather than a deliberate decision to encourage financial responsibility. I struggle to see how the possibility of lifelong debt slavery is moral.
It's just - I do have a bit of a problem with the underlying morality of this system, and our (Norway's) culture is so homogenous that few locals ever question these things. It's refreshing to share this on a forum where lots of people are curious and have an open mind.
It's not like this is a massive social problem. People who end up in this kind of misery still have a roof over their heads and get to eat and have good healthcare access. But they wouldn't really expect to ever get back on their feet status wise, and that's sad.
My brother was hit too, though I can't recall the exact year.
He ran a small profitable business in the Copenhagen area but was hit badly by the downturn in the economy. He eventually ended up selling at a loss (I think) and moved north with his family so now they also live in Norway.
- There's no shortage, rather the opposite, even in urban areas that are still growing in population.
- Housing value typically only depreciates over time.
In Switzerland, real-estate mostly belongs directly or indirectly to pension funds. This creates all sorts of wrong incentives.
Isn't this what is happening right now in the US, that the down-payment is one of the barriers, since less than 10% (forget 20%) down has huge penalties long-term?
Sellers will heavily favor a cash offer, as it's faster and far more assured of going through. One strategy I've heard about people doing is to take a pile of cash, acquire the property, and then refinance it pulling out 80% of what they put in so that they can both have a mortgage and have a stronger buying position. Add in things like dropping inspection, no contingencies, etc... and it gets really hard for many first time home buyers to compete.
Additionally, coming in with an FHA 3.5% down, vs someone with a traditional 20% down - the sellers will favor the 20% as again it's less paperwork, easier, faster, and more certain to go through if the assessment is off by a few %.
I had no idea about this before trying to buy a property in New England. So much of traditional advice doesn't include these details.
What's weird about it to me is that this is one of the few places in US consumer markets where the seller cares deeply about your method of purchase and where the money came from. Buying a used car? They don't care if it's cash, credit, loan, etc generally. Hell, most car dealers want you to use a loan from them and would prefer that over cash in many ways. When you go to WalMart, they don't deny you buying something for using a credit card vs cash.
Did you mean geographically? Or temporally? because if the second, I'm pretty sure that is a direct legal consequence of the 2008 housing meltdown that boned both sides of the lending equation.
Often times sellers are trying to buy another home and have put a contingency offer (depending on the market) on another home, so they're heavily incentivized to accept an offer that moves quickly so that they can close sooner. A tiny bit more money may not be worth the risk of having multiple deals fall though, hence all-cash offers and traditional loans being more attractive.
With that context, it's no wonder why sellers care so much about the method of buying.
It's not weird at all. Buying a car or TV from Walmart with a credit card does not carry anywhere near the risk of the transaction failing that buying real estate does.
It's simply a function of the probability of the transaction succeeding (or "closing" as it's commonly referred to). With a loan, there are multiple parties whose requirements need to be met, from the lender, the home insurance, the title insurer, the seller, etc. The more entities you cut out, the less chance of the transaction failing. Underwriting a car is also much more simple and less risky for a lender than a house, which has much higher downside risk and unknowns.
Not to mention the myriad laws resulting in legal liability and opportunity costs relating to real estate purchases, as opposed to a car purchase or a TV purchase where the worst that can happen is the seller takes it back and sells it to someone else.
The financing contingency means that if your financing falls through, you get your earnest money back. Assuming a 500k purchase with 1% earnest money, waiving the financing contingency means that the seller receives at least 5k.
Even with a financing contingency waived, if the buyer has 100k, and their financing falls through, there is no way for them to magically make 400k appear for the sale to happen.
If you are assuming that the buyer has the full purchase price in cash anyways, and are only taking a mortgage because rates are so low, then ya, your point stands (waiving financing contingency along with proof of funds). But lets not pretend that having cash to cover the full price of the property is the common situation.
Also not a guarantee for the seller - but they’ll get to keep the deposit
I'll also add that in competitive markets you also get into a situation where it's a bidding war and you're pushing what the property might appraise for. If you're doing 3.5% down, even though you might be approved up to X, the bank may not be willing to stretch the appraisal for the property. With 10% or 20% down, that's less of a concern.
Also FWIW, for new cars, how you pay does matter. The dealer makes money on the financing, so they will give you a different cash price vs if you go with their financing. The reason being is that they want to sell you a "zero percent" loan that effectively bakes in the interest up front, so their financing will look better, but the final price will be higher.
It's definitely not ideal but it's not an overall huge drag.
This seemed to completely miss the point of a down-payment, but apparently banks were willing to go with it. They even offered the dual loans as a single product for convenience.
If you work the numbers out it can theoretically save money over the long term vs. renting long enough to save the 20%, especially if it means you can put more money into risky stocks with high returns, but it also increases your risk of financial disaster if the bubble for some reason ever stops inflating, but that never happens as we all know.
Personally I though it was too sketchy and went for a more traditional loan, but I know several people who took loans like that.
ironically because the loans where insured they offered lower interest rates on these loans, which meant they costed almost the same as 20% uninsured loans (you paid the insurance premium on-top of your mortgage payment).
even if you have a 20% down it made more sense to put 5% down and put the rest into the index funds or a HISA.
Where Real part is down payment and Imaginary part is land price?
Seriously though, this has been the situation in the UK for a long time. Today the down payment is equivalent to price of the house in the 1970's.
So if you buy a 1.25m house and take a 1m mortgage 5% is of that is 50k, so your salary has to be 150k.
Point 3) is wrong, they make still a lot of money with loans, a lot of people still take 10 year loans for somewhere between 0.6% and 1%.
This can be resolved any time cities want to build a lot more housing: https://www.theatlantic.com/ideas/archive/2021/01/anti-growt.... Outside of Tokyo: https://news.ycombinator.com/item?id=16704501, no or very few cities in the Industrialized world have chosen to simply build lots of housing, which will tend to bring prices down towards the cost of construction.
Similarly for Zurich, there are significant hills around and most flat space is already built up.
There are cheap houses available outside those areas, but getting a loan for them can be tricky since their value is too low and there's no money to be had from lending the money.
Furthermore, most people have their homes as security (not sure if it's the right word in English) for their loans. If the property value drops then many will be forced out of their homes. Also a lot of landlords and real-estate agents, will be out of a job, but that's probably a smaller issue.
Owners generally keep a mortgage on their property (~65% of the property value) to off-set wealth and property taxes. Residences are taxed by their estimated rental values, which is treated as income. Interest payments are tax deductible, while the principal on the mortgage lowers the amount owned for wealth taxes.
The other issue is that most primary mortgages don't allow for early repayment, meaning that the principal either has to be payed off in full or refinanced once the payment period is over. Owners become conditioned to continuously roll over the principal on their primary mortgage.
To answer your question, because the expectation is that residential property will be mortgaged through out the entire ownership period, banks have to make sure that someone who can afford the payment on a 1% mortgage can also afford the payment on a mortgage refinance if and when rates eventually go up.
I haven't looked it up, but from what I've been told a lot of it also has to do with investment laws for Pillar 2 and 3 retirement accounts (a certain percentage has to go into Swiss assets). Taking 1-1.5% over LIBOR/SARON or whatever the SNB rate is makes sense, but the fall-out in a couple of years if and when rates start to move up again isn't going to be pretty.
Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) .
This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets.
Banks usually don't keep the loans. They are sold off quickly for a higher profit.
This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro.
To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments.
This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee.
If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
* https://ca.investing.com/rates-bonds/netherlands-government-...
Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.
Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it.
Depending on the class of bond, you get paid more or less (this is the CDO)
The profits are from the bonds on the loan in the stock market.
Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing).
True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt.
Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.
> The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period."
Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)?
Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.
Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited).
As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled?
Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition:
> The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location.
> Apologies for all the questions this is fascinating
No problem! I'll do my best to answer what I know.
[0] https://practicalislamicfinance.com/2020/02/17/short-selling...
The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
Islam prohibits something called Riba. Interest and usury fall under it, but Riba encompasses more than just loans. The example about purchasing gold on credit falls under riba for instance.
These are the very foundations on which modern society is built and which drives the entire humanity forward. Sure, some people have managed to race ahead but on a whole we, as humans, have progressed from clubbing each other for food to arguing anonymously over the internet thanks to all these
As a matter of fact, I would wager that these practices are a main driving force of the wage gap we see today, causing instability and unrest, inflation, and tons of other problems. We have better solutions, it's just that no politician I've seen so far is going to dare admit that the modern foundations are corrupt. Very powerful people are not going to be happy (note that I'm not arguing for socialism or communism either, they are destructive in their own ways).
And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have.
Just because we inherited a world where these things exist, the tendency to attribute them all to these things is not wise. I don't know what to call this fallacy.
Exactly. It's not needed. It causes a growth at all cost situation we see today (and one cost is debt slavery for a large portion of the population, increasing the wealth gap).
I have no trouble accepting that these things co-occurred with the movement. I don't have a good reason/foundation to argue that they were necessary, or even beneficial, apart from artifacts that smoothen and/or amortize risks, insurance, for example.
Banks can and do routinely turn away higher grade borrowers with no other relationship angle (ie no short or long-term profitable cross-sell) because those loans are unprofitable for them and they can only make money on riskier credits.
More broadly, sub-zero base rates are a real problem for banks and may actually hurt rather than help credit creation (since banks are likely to do less of something which is less profitable).
The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates.
All this does contribute towards the search for yield phase of the credit cycle (CDOs were just a part of that - everyone likes to blame them but they didn't cause the credit cycle which is really a "natural" phenomenon, although they did act to obscure the amount of leverage in the system and thus the likely size of the damage when the bubble burst). Everyone across the board wants to take more risk because they can't make their numbers stack up with the less risky part of the credit spectrum. As a result over the long term some credit becomes mispriced and when there's a wave of defaults credit investors wind up losing money overall then we start the cycle again.
It's been quite some time Switzerland have negative rates and the threshold for charging the customer are getting lower and lower, closer to 100k than to 1B (base fees have also increased as a result of negative interest rates, easier to increase the banking fees than charge negative rates :))
As long as the loan is 'conforming' (which the majority of loans on the up-and-up are) then Fannie or Freddie will guarantee it. Conforming loans must meet a number of criteria (Debt to income, income versus home value, etc.) to have a level of trust that the borrower will repay.
Edit: And yes, if you get caught selling a non-conforming loan to Fannie/Freddie (i.e. underwriting discrepancies) you can get fined and forced to buy back the loan. In fact sometimes they will go on fishing expeditions and companies will have to prove their innocence, almost like an IRS Audit.
There is also the 'servicing' aspect of a loan. Servicers basically collect payments for loans and forward them on to whomever backs the Mortgage. For Fannie/Freddie loans, what this means in case of a default is that the servicer will have to 'front' the money; this is what the housing industry was worried about at the start of COVID: before the guideline changes related to the virus, there were concerns about liquidity in that 'gap' between forbearance and (potential) forclosure.
Banks fund themselves using a variety of sources - bonds and money market instruments (of various types), equity, deposits, past profits (which is really the same as equity) and various central bank mechanisms. Of those the only ones where there is a decent chance of funding at negative rates are bonds/money markets and central banks.
Bank profits have been squeezed by negative rates precisely because they've been forced to pass on more of the rate reductions to borrowers than they've been able to recapture for themselves.
What makes money for the bank is the difference of interest rate between money they buy and money they sell. Whether one or both are negative or positive doesn't really matter. Relative difference is what matters.
In econ-101 it doesn't matter what the spread is, it isn't in itself rational to lend at 0%. That is taking on risk with no gain.
There must be some strange contortions in place to make this work. Whatever a "loan" is these days is going to be a totally regulatory construct with little connection to what they used to be way back when.
But they do not have to buy the same quantity of money as to what they are selling. When making a loan money is created out of thin air.
They do not have to hold deposits in the amount they lend out, but they do have to have the money. They have to hold back a fraction of the deposits.
If money was created out of thin air (in consumer banks), any loan with any interest rate (even negative one) would be highly profitable.
I am not talking about central banks.
The bonds have a 0% coupon but the value is now 96.725: https://www.nordea.dk/privat/produkter/boliglaan/Kurser-real...
So the buyer of the house (seller of the bonds) would have to sell 3.3% extra bonds. And the buyer of the bonds gets a discount.
As for why anyone would buy such bonds: The system is considered very stable (no US sub-prime mess) so if you have a lot of money, do not want to take risks (stocks and forex) and your bank charges you negative interest, it might make sense.
As for the house prices. Yes they are going up. But you still have to pay back the money in 20 years. Or remortgage, but then it might not be at 0%.
Another thing to consider is that property taxes are based on a public valuation that have some correlation with what you would be paying for a house (valuations is big mess now, but it will probably be fixed in less than 20 years).
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.
Sorry but wow. This is not the kind of comment I expect on HN, but rather from my uncle:
“We got this new Lexus, it’s only $500/month!”
“Yes, for 200 years”
Houses are nothing like cars. I haven't had a car payment in many years. I'm still a long ways from never having a house payment.
I saw this vividly when I bought my first house. It cost $61,000. My mortgage was at 9%. Two years later, mortgage rates had dropped to 7%, and my house was worth 90,000 (state appraised value). If I had bought the exact same house two years later than I did, I would have had the same monthly payment. That stayed constant, and the interest rate change drove a change in total price.
Part of the reason is: What is your alternative? Typically, renting. What's rent? A monthly payment. So if you're looking at a buy vs. rent decision, a big part of the decision is monthly expense of renting vs monthly expense of buying.
> is monthly expense of renting vs monthly expense of buying
Note: "monthly expense of buying" is very different than "monthly cash flow of buying".
The "monthly expense of buying" is the monthly interest paid, taxes, and maintenance.
The "monthly cash flow of buying" is the monthly mortgage paid (principal and interest), taxes, and maintenance.
When deciding to buy a space, you need to use the "monthly cash flow" to ensure you don't default on the loan. When comparing buying vs renting a space, you need to use the "monthly expense".
You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.
I believe what he is actually saying is that most people _only_ care about their monthly payment.
Caring about the monthly repayment is important.
But so is caring about the interest rate and the principal.
I stopped into a car dealer to look at a vehicle a couple years ago. I liked how it drove, could pay cash, but wasn't opposed to taking out a loan if I could get a better price overall (sometimes possible with fees banks pay to used dealers for getting a loan originated).
In my experience, they brought out a sheet of paper with a range of what the monthly payment would be. I asked about interest rate, and the sales guy had no idea what interest rates the payments equated to - but he could get me an exact payment after doing a hard pull on my credit. They resisted negotiating on the total cost of the vehicle, but were very willing to extend the loan out to make the payment exactly what I wanted/could afford.
I could see it wasn't going anywhere, told them to call me if they get serious about reducing the price, and left. I found a great car on the private market a short time later.
I did my house shopping the same way. For some reason realtors are a lot better about negotiating the actual sale price than car dealers are. I never really had a realtor try the "So, tell me about your maximum monthly payment!" pitch on me, probably because you're expected to have your financing lined up before you shop.
If you're going in to buy something with a "max monthly I'm willing to pay" in mind, you are setting yourself up for a really bad deal.
Then again, we basically didn't go to a dealership other than for test drives. We e-mailed every dealer within an hour and a half of us with "This is exactly the make and model we want, these are the options, this is the color (but we're open to substitutions), what's your best price?" We took the lowest bid, and if there was any funny business (there was with one), we walked.
Most dealers now have online sales departments that are setup for these low-overhead but low-price transactions (this was a rarity when I bought mine in 2009). Apparently the sales guy we bought from sells 3x more cars than the next-best sales guy at the dealership, because he knows how to price the cars to move online and then acts straight & efficient when the buyer comes in.
He held up his end of the deal, paying 18% interest on a massive truck loan for 3 months.
The sad thing is many people would do the same thing without the ability to pay it off in full. At that interest rate and a ~7-10 year loan term, you'll be upside down on the vehicle until the very end of the loan. And most people wouldn't keep the vehicle that long because something else changes in their life...or they just want a newer vehicle.
I haven't owned a car and i'm almost 30, and have always enjoyed public transport so far.
When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.
That's what I did, and as such I agree, but just be aware that you might very well end up paying more overall that way (assuming you're buying a new car from a dealer).
Another example is most people never pay off their mortgage. Some refinance, often several times, resetting the term. Eventually they'll sell the house, pay off the mortgage as part of that transaction, and keep the change (if they're lucky.)
Salesmen, well auto sales, are trained on the four square method to get you to buy. You could attribute the mortgage crisis a decade back as falling into this situation.
The barrier to buying a home used to be the down payment but creative financing is what got a lot of people in over their heads. It all about that cost per month.
Now people who over reach tend to forget all the other costs that come with auto and home ownership, namely insurance but owning a home has long term costs too.
https://www.consumerreports.org/consumerist/dealerships-rip-...
This means that car payments are more of a cost of ownership and house payments are more of a reoccurring investment.
As long as the house is actually a good investment, being able to afford the down and monthly payments is the most important thing. Rather than spending vs saving/investing, the trade-off becomes more of investing in real estate vs investing in something else.
Where "stop playing the game" means get out of hot housing markets :/
House prices are defined by demand. If your uncle wants to buy a house with a 40 year mortgage of half his salary, then I'll have to pay more to match it.
They can stay high or low for quite a long time...
If interest rates go up to 6-7-8%...double digits, the housing market would be a bloodbath.
It's possible we hit a point where inflation ticks up due to recent stimulus/printing, and the Fed is forced to raise rates suddenly. The recent change to allow inflation to run past 2% indicates they're likely to let it run for a bit, though.
My mom was a teacher and said that when she graduated in college (late 60s), teacher salaries were maybe 20-30% below engineer/lawyer/professor salaries. By the time I was born (early 80s) her classmates in those professions were making 3x what she was.
Mortgage rates: https://themortgagereports.com/61853/30-year-mortgage-rates-...
Housing prices: https://inflationdata.com/articles/inflation-adjusted-prices...
Inflation-adjusted housing prices went down about 20%. Nominal home prices basically stayed constant for about 2 years, then resumed marching upwards.
Also note that the actual bloodbath happened from 2006-2012 (when the housing crash took prices down about 35%). It does not correspond to any major increase in interest rates. The primary driver seems to be foreclosures, which in turn was driven by ARMs and poor lending standards. Conclusion might be that interest rates just don't matter that much as long as a majority of people are on fixed-rate mortgages, while they can matter a lot if folks are on ARMs they can't afford. (Interestingly, we may get a similar crash of multi-family housing in the near future, since all the tenants not paying rent now is having a similar effect on mortgages.)
So either one of us has some miscommunication, or things are different where you live.
The price is certainly relevant when it comes time to sell, and a high price due to low interest rates leaves you more vulnerable to price shocks in the event rates need to rise.
Of course we haven't seen any major price depreciation due to rate increases in the last few decades :)
But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.
Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.
So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.
Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.
If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.
Don't forget the tail risks of inflation.
The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.
From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.
In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.
https://fred.stlouisfed.org/series/CASTHPI
https://fred.stlouisfed.org/series/FEDFUNDS
But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.
Unless we're willing to go negative, that cycle is coming to an end.
It kills any idea of getting a real return on your house but frankly that was not a real thing through most of history anyway.
IMO, for primary residences you did the right thing (if you want a house of course).
Another nice thing about owning a home is you can improve it (additions, adding bathrooms, etc) and certain additions more or less pay for themselves in terms of "getting your money back" over enough time. Again, probably not going to outperform the market, but you get to live in it. So even if the market tanks for a few years, I still get the benefits of whatever I've invested in my home.
The trick is to not overspend on a home. Too many people use all their savings to make a downpayment and then use too much of their income to pay for it. This can not only get you in trouble but also puts you at a serious disadvantage in terms of accumulating wealth.
All things degrade due to entropy. Things cannot truly become more valuable by themselves.
I think raw land is one thing that can become valuable on its own. Of course billions of years from now it will be gone.
Where I live the land is very much a big part of the cost of the home. The structure is worth what it would cost to demolish plus rebuild it minus existing wear and tear/needed repairs I figure. The value of the structure doesn’t appreciate as fast as the land it is on due to degradations as you’ve pointed out and materials/labor usually not increasing as fast as appreciating assets which the land itself is. Of course in many locations the structure is worth more than the land it is on.
Hence location being the most important part of the equation as any real estate agent will tell you.
The land doesn’t become “valuable on its own”, it’s just used to extract value from other things.
> In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
> ...
> As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.
Wealth of Nations
On the other hand, where I live a reasonable small house is £150,000 and senior developer wages are about £30,000 (net). People need mortgages.
Government has just allowed first home buyers to get a mortgage on a 5% deposit. While that sounds great, it's obviously just encouraging more debt to flood the market and drive up prices.
And of course the government doesn't give a shit about housing affordability. The standard practice here is to get at least two mortgages: one for the house you want to live in, and one for an investment property that you'll eventually sell to pay off your other mortgage.
Sounds stupid right? Well, not when the government gives massive tax benefit handouts to property investors:
1. 50% capital gains tax discount.
2. Negative gearing: basically the losses on your investment property can be claimed as a tax offset against your other income.
[1] https://en.wikipedia.org/wiki/Capital_gains_tax_in_Australia
[2] https://en.wikipedia.org/wiki/Negative_gearing_in_Australia
One important difference between Geneva and Denmark though - Genevas extremely expensive housing market (in both purchase and rent prices) is driven by its geographical location. It's surrounded by mountains on most sides and sitting on a lake. This means there's pretty much no space to build more buildings to accommodate the influx of people moving there to work in science and politics.
Geneva building prices were skyrocketing without those loans just because there was no way to build more.
Surely it’s more profitable to do nothing?
https://en.m.wikipedia.org/wiki/Negative_interest_on_excess_...
So if an investor has no other opportunity than 0% for their cash it's a "good place". Many banks in Europe has negative rates on deposits so it might be the better alternative for some.
But there are no banking in a traditional way involved here where they have a product and lend to 0%.
While a corporate bond can go sour and a government bond may well be legally wiped out, a mortgage is at least collateralized with the property. Assuming that that the negative interest rate regime continues - which it most likely will - property prices will be driven up even further. Even if the mortgage goes into default, the repossessed property may end up being worth even more at that point.
Also this isn't really that great since lower interest means higher home prices. I'd rather have high interest and low home prices if I were a buyer and try to pay if off ASAP or refinance to lower interest when the rate drops. Buy when interest is high and home prices low and sell when interest is low and home prices is high.
Those with more expensive housing benefit more from the credit. Non-homeowners do not benefit at all, and renters tend to be poorer than homeowners.
The mortgage interest deduction serves to put the purchasers of owner-occupied real estate onto a more equal footing with commercially-rented real estate. That seems like a valid public policy purpose, even though the mortgage interested deduction became substantially less valuable with TCJA-2017.
Before I bought the apartment, however, I paid more than that in rent. And all that was money going to someone else. If anyone deserves a tax break, it's those not privileged enough to yet own their own home.
Edit: sorry, in my language "rente" is "interest", so I mixed them up and meant to say I get to deduct the interest part of my mortgage payment in my previous post. Probably where the confusion stems from.
Not anymore. The rise in the standard deduction combined with caps on SALT deductions has drastically curbed the value of mortgage tax deductions. As a result, the number of people in the bottom 90% of income who itemize their taxes has fallen precipitously.
https://taxfoundation.org/standard-deduction-itemized-deduct...
This is a good thing, because SALT and mortgage interest deductions were horrible, regressive policies.
A typical home can sell for DKK 4M. With a 20 year 0% interest and 80% of the 4M mortgaged (the maximum allowed), the "contribution fee" would be set at 0,75%.
That would amount to interests (0%) and "contribution fee" (0.75%) yearly around DKK 24000 (1st year) of which 25% = DKK 6000 will be deductible.
To put that into perspective:
A. An average "medium level" worker will have an average income of DKK 466,660/year[1] and pay DKK 159,212 in taxes, leaving a post-taxes income of DKK 307,448.
B. An unemployed will receive DKK 225,894/year and pay DKK 58,952 in taxes, leaving a post-taxes income of DKK 166.942
So in reality the mortgage tax deduction does not amount to much. With those low interest rates it is around DKK 6000 or DKK 500/month for a typical family.
Compare DKK 6000/year or DKK 500/month to: - a pair of Levi's: DKK 660 - a 4G/5G plan with 50GB/month: DKK 160/month - iPhone 12: DKK 7000
[1] https://www.dst.dk/en/Statistik/emner/arbejde-indkomst-og-fo...
That is the based on the "official estimated value", however, which is typically conservative and lagging and therefore somewhat less (like e.g. 60%) of what the property actually sells for.
The 3M is set so that the vast majority of homes will not exceed this value.
In addition to that we pay a "lot tax" which varies by municipality between 1.6% -3.4% of the value of the lot without the buildings.
The interesting part is that that this rate can be changed over time to whatever the lone-shark wants it to be, thus - as always - you need to look at the TCO.
ÅOP as it is in danish: "Årlig Omkostning i Procent" - aka the Yearly cost in percent...
https://news.ycombinator.com/item?id=11082905
Where APR is the effective rate including fees.
It's a little screwy, because you're getting paid the lenders instead of the borrowers. But it's still fundamentally no different than a bank that borrows at 2.5% and writes mortgages at 3% APR.
I guess you could argue if the bank is not paying interest on that money, then they won't lose anything if the client is in default. I think there's probably still opportunity costs to the bank in that case - they could be loaning that money to a client that pays additional fees and makes the payments on time. But I imagine they would still foreclose and sell the asset to recover the principal in that case. Which might turn a profit for them.
If I was to refinance to a 30 year mortgage with the same bank/mortgage lender this quarter I would get a 0.5% mortgage with 'bidragssats' at 0.6812% so around 1.18% effective rate. This would also increase my principal by ~30000 DKK or around $5000.
This is like a Canadian getting a 3.0% loan in USD to buy a house, then having the Canadian government fix the Canadian dollar such that it appreciate 3.0% pa against the USD. It's effectively a 0% loan, but due to obscure technicalities.
It seems, the lender still earns interest, it's just that the interest is covered by the variance in exchange rates between currencies. So your DKK1000 mortgage payment is worth €1030 after the first year, €1091 the next, etc.
From your point of view as the buyer. You basically are being given an amount of free money to on the books take an amount of debt.
The thing about negative rates, it's effectively society is saying 'do anything so long as it's not risky.' even if it doesnt make sense.
It makes sense, tons of money is moving more conservative. Boomers are headed into retirement and need to move their money to safety. Except where are they investing it safely? In those bonds that are negative. They are losing money in their investment.
There's also the reality that the boomers have not saved enough in their generation. Many of them are expecting underfunded social programs are going to keep them afloat. That's not going to happen. In many places those retired cant make ends meet and therefore you get silver crime. https://www.telegraph.co.uk/news/2017/11/20/poverty-ageing-j...
So the boomers will raise the money to retire by inflating housing values and the younger generations buy this debt theoretically when they move into those bigger homes. That's not how it will work. It will inevitable result in exactly the same interest rates and inflation like the 70s and 80s during the WW1 boomers.
I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.
The reason I think is that interest/mortgage/etc rates just reflect how much people/banks/etc are willing to receive in profit for parking or lending their money somewhere. This has gone to 0% (almost no profit) because no one can offer good returns on the money. Or the people receiving the money have so many choices that the lenders are forced to compete to 0%. All the VC money sloshing around for free is because there is no more favorable place for that money to find profit and the 1-in-10 (?) shot that startups have is still better odds than average other opportunities.
Right now it seems there is too much money searching for returns. And that money is not somehow just going to disappear over time.
To take the opposite hypothetical, if you consider the accumulated wealth of all countries now, and the relatively low growth of most of them, how could it be possible that all that money could find good investment return rates? Except for isolated pockets of growth, need for investment, where will we find broad returns anything greater than a few %?
So, until something fundamental about the money supply changes, are we in for a long period of pretty much 0% returns?
I would love to know some more sophisticated ways to understand the situation.
This is creating market bubbles. Worthless tech stocks is one place. Housing prices have soared. Whatever might happen might happen quickly.
Yes, 17-20% interest rate was not unusual in 70s, 80s, but home prices were much much lower back.
Alternatively, if you think for the market as a whole there are not meaningful constraints on supply of housing or land, the more relevant adjustment might be for increases in construction costs.
Interest rates have a direct affect on property value.
Note that I do believe that this effect isn't quite as present in the "ultra-luxury" markets (or at least as a much lower impact)
For a 100 000 USD home without a down payment, and a 10 year loan you'd pay 1738 USD per month for a total of 208 500 USD. I've used 17% yearly interest rate.
=PMT(0,17/12;10*12;100000)
Today if you used 3% interest rate, your monthly payment would be 965 USD for a total of 116 000 USD.
Buying homes on loans was insanely expensive in 70s-80s but probably the growth of prices of homes made up for it.
This is another proof why government shouldn't intervene into the market by offering loans or subsidies. Usually what they end up doing is completely opposite of the intention. Instead of subsidizing young buyers to buy homes for less cost, they end up subsidizing the owners of the houses.
Or too little returns available for all the money. This is the expected end-game for a well developed society, where people have most of what they need so extra capital can't move the needle anymore...
What is kinda good. The problem happens where not everybody is included on that "well developed society" and the excluded people don't make a difference because they get too little money to participate.
In Europe as a whole, yes, it is in deep stagnation. There is no where near enough investment opportunity for the wealth within the block, and this is made doubly worse by the governments subsidising all investment, essentially eating half the investment opportunity (while simultaneously creating a beaurocratic nightmare which also needs to be paid for). All the remaining wealth just piles into any old unproductive asset which can out perform the -0.6% bank rate.
If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.
I have read about that, and it was worth a good laugh and a "what's the world coming to" kind of head shake. Mind boggling.
Hahaha, so as the governments the world over propagandize (read black money/corruption) people to move to digital cash the banks are legally allowed to hold mountains of them. And ...even charge people a fee to withdraw there own money as cash.
https://www.bloomberg.com/news/articles/2020-01-31/german-ba...
It almost did, in 2008. Something like $3 Trillion evaporated in a very few months. To prevent a disaster that hurt a huge chunk of people, the Fed injected $3 Trillion back into the economy. The Fed was starting to draw that back down, but the economy got jittery, and then Covid happened.
We have the problem (too much money) because the price of fixing it was too high (short-term catastrophe).
Since there are quite large expenses associated with refinancing the mortgage most people put up with this.
Instead, to prevent prices going to infinity, there is usually some kind of laws in place for maximum length such as 30, 50 or 100 years (infinite I.e interest-only was common at least in Sweden when rates were higher), a minimum down payment such as 15%, a maximum size of the mortgage relative to the income etc.
Sweden now has all of these (!) so for most buyers, whether the interest is 0.5 or 3.5 makes very little difference. Most buyers, especially first time buyers, will be capped by one of the other limits regardless.
As it has been pointed out, this loan isn’t 0% since it’s not the effective interest rate including fees that is 0%.
[1] https://i.imgur.com/m5E6Tvd.png
The same mortgage product cannot be bought anymore...
Afaik, the norm is 20% down, but the banks will loan you another 15% at a higher rate if you want that.
Ha, I believe that the guy told you that, I don't believe he is correct. :) The bank is not a non-profit and is totally making money on that mortgage. A considerable margin in fact, given how much effort goes into it.