A recent article published on Bloomberg referred to the cooling of the hottest residential property market in the world, no not the Atlantic Seaboard, but Sweden, which is apparently up 44% over the last few years. This should come as no surprize given that Sweden was one of the first countries to have negative interest rates.
Let’s take a step back here and explain the concept of negative interest rates, which is as foreign to us as South Africans as the Swedish language. Negative interest rates are effectively where the lender pays the borrower for taking the money.
Yes, you read right. Swedish banks have to pay their Central Bank to hold deposits from them and it is not just the Swedes, 35% of all global bonds currently in issue have negative yields. This is leading to weird behaviour, of which one of the best examples is that of the Swiss tax office who wrote to all taxpayers and requested that they delay paying tax until the final due date so they could avoid paying the bank to hold the money on deposit.
If you can borrow money at extremely low or for no interest then surely it makes sense to borrow money and buy property, which is generally an appreciating asset. Your loan amount stays fixed so you simply service the interest and the value of the property grows. You are effectively using the banks money to make money for “free”. Keep in mind if you did not own the property you would in any case be paying rent, which is probably a lot more than the interest payment. Absolute no brainer would you say?
Well that depends if you are Japanese or not. In Japan rental yields are around 7%, which means if the value of the property you are renting is one million yen then you are paying seventy thousand yen a year to rent the property. However the banks will lend you one million yen to buy the same property for 1.5% per annum or fifteen thousand yen. So why would you ever rent if you could buy for fifteen thousand vs. paying seventy thousand rent.
Ask any Japanese and they will tell you that “everybody knows property loses 5% per annum in value”. Let me say that again for all Robert Kiyosaki, author Rich Dad poor Dad, disciples who firmly believe in buying property using the banks money. Property values have fallen by 5% per annum for as long as anyone can remember. If it costs you 1.5% interest to buy plus 5% loss on the property value then your total cost is 6.5% per annum, which the same as renting for 7% without the stress of buying.
Financial repression, which is associated with quantitative easing (QE), zero interest rates (ZIRP) and now negative interest rates (NIRP) have driven up asset prices in property, bonds and equities to levels where value no longer seems to matter. Buying defensive quality businesses at any price irrespective of the underlying long-term intrinsic value has become the crowded trade and continues to drive developed stock markets indices to new highs in a self-fulfilling cycle where investors buy shares because the prices have risen, which pushes the prices even higher, which attract more buyers and even higher prices.
For me the latest buzz word in financial markets is a worrying contrarian indicator for the top of the cycle. TINA stands for “There Is No Alternative”, in reference to buying equities / property or high yielding bonds at any price rather than earn nothing in the bank or even worse pay governments to take your money.
Time for a cool head focussing on preserving wealth; “Be greedy when others are fearful and be fearful when others are greedy”. Warren Buffet
Mcomm, CFP®, HdipTax
T. 021-851 3746