It may seem extraordinary that in the aftermath of the infamous Kocherlakota “dots” the Fed is actively contemplating negative interest rates, but some may have forgotten that Europe has had NIRP since last June. In fact, the reason for today’s global risk-on rally, was Draghi’s hint – remember: Draghi did absolutely nothing, just suggested he may do more – that in addition to extending the ECB’s QE program, the ECB may cut its deposit rate, already at -0.20%, to -0.30% or more.
But when it comes to negative rates, the ECB is merely a late adopter. For the real pioneer one has to look further north in Denmark, where the central bank first adopted negative rates in the middle of 2012 to defend the krone’s peg to the Euro. And, as documented here before, Denmark cut rates not once, not twice, but three times in early 2015 in anticipation of the EUR collapse, pushing its interest rate to a record negative -0.75%.
Denmark’s descent into NIRPdom is shown in the Bloomberg chart below.
So what happens after 3 years of NIRP?
Well, according to Bloomberg, you get the mother of all housing bubbles, one which makes even China blush:
“Property prices in Copenhagen have risen 40-60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro.”
This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses as we explained in January in “In Denmark You Are Now Paid To Take Out A Mortgage”, so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.
What is disturbing is that Denmark is reflating a gargantuan housing bubble less than 7 years since its last housing bubble popped:
