What are negative interest rates & how they will fuel a housing crisis


What are negative interest rates

What are negative interest rates

Sweden is already in the mature stages of experiencing a housing crisis. Take a look at the chart below. Home prices are surging simply because it is cheap to borrow money. The lower the interest payments, the more you can borrow. Hence, individuals throw caution to the wind and start chasing property because they believe prices will continue trending upwards. What they forget is that no market can trend upward forever.

More and more nations are embracing negative rates. Therefore, as rates head into the negative zone,  it will have the unintended consequence of fuelling another housing bubble. Suddenly property that appeared to be out of reach could be within reach, only because the monthly payment seems affordable.

Eventually, the U.S is going to lower lending standards and when they do, expect the housing market to explode as there is a lot of pent-up demand. The public has been shut out of the markets for a long time, and when you give someone freedom after locking them up for a lengthy period, they go insane, and that is what lies in store for the housing market.  The Fed has laid the path out, and this was planned years in advance.  Take a look at the Swedish real estate market as depicted in the chart below. The Chart for the US and UK housing markets will look 5 to 10 times worse.

What are negative interest rates & how central bankers are embracing them

The map below illustrates that the war on interest rate is gathering momentum

Negative interest rate map

Source: The Telegraph

Additional dangers of negative rates

As more nations embrace the era of negative rates, no nation is going will be in a position to resist. The slogan will be “surrender or die” and countries will opt for submission as no one wants to die.  Negative rates will also fuel a massive new round of share buybacks. The Fed is trying to put on a brave act, but you can already see them backtracking from the firm stance they took last year. Now they are stating that all is not well, and the economic outlook is weaker than expected. They will have no option but to join the rat pack; in this instance, resistance is futile.

The corporate world has gone a massive share buyback binge, and this binge is not showing any signs of letting up.  It allows corporations to borrow money for next to nothing and then use these funds to buy back massive amounts of shares and in doing boost the EPS (Earnings per share).   Negative rates will provide rocket fuel to share buyback programs.  Corporate debt will soar to insane levels; if you think today’s levels are crazy, you are in for a rude awakening as debt levels will soar beyond anyone’s imagination.

.This video illustrates property prices surged an average of 50% in the past ten years; this how bubbles start

Suggested Plan of Attack

We live in a world of extreme greed, and our government seems to favour corporation fraud; against this backdrop, you need to do that which seems insane from a logical point of view.  All substantial Market corrections should be seen as buying opportunities.  From a mass psychology perspective, this is still the most hated bull market in history and until the masses embrace, it is destined to run a lot higher than most envision.

Additionally, it would be advisable to hold a core position in Gold; at some point in time Gold will start to react strongly to this massive form of currency debasement. Currencies are being destroyed on a global basis at a level never seen before. This will not end well, but as we have pointed out many times before, being right does not equate to market success. One has to look at the time factor, and most individuals do not have the staying power to bet against the Fed. Wall Street is full of tombstones of good men who were right but could not stay solvent long enough to benefit from their insights.  Hence, we would not bet the house on Gold and nor, should you? No matter how good an investment appears to be, one should never put all of one’s eggs in one basket

An updated view on Negative rates

Thirty per cent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favourable cross-currency hedging rates—or at least to avoid greater losses elsewhere.

The negative-yield phenomenon is turning financial markets on their head—raising the spectre of a bond bubble, draining pension funds of a valuable source of income and incentivizing riskier companies to mortgage their assets. At the same time, banks are having to reassure citizens that they won’t suddenly start charging customers to store their money.

Investors are willing to pay a premium—and ultimately take a loss—because they need the reliability and liquidity that government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth. Full Story

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1 comment

Taleah Prince

This doesn’t paint a tru picture – each country is different depending on variables such as ; Landmass (availability to build houses) density of housing within a country, population of a country and this leads to supply and demand (how many houses are built – how many want to buy one)
In the UK where the human density is the highest in Europe, immigration is almost 1 million per year, only a few thousand houses are built each year – there is pent up demand for houses/accommodation – supply cannot keep up with demand and this will not ease until all immigration is stopped and more houses are built…. aka… not in the next 10 years.