Low interest rates - morphine for the terminally ill housing market.

The Financial Times reports today that the indications are that the low interest rates are helping house prices to rebound. Personally I am horrified by the fact that such a situation is not being highlighted with greater concern by the government, economists and sane people generally.
The article itself hardly highlights the worrying matrix of fundamentals that means that any such rebound is likely to simply result in more people overstretching themselves and house prices taking longer to correct to a more realistic level reflecting earnings, affordability and available finance.
At the height of the boom there were some who warned that the housing market was becoming overheated and that the Bank of England needed to consider raising interest rates to control the growth rate of house prices which was outstripping any increase in wages. The BoE, whose main point of reference for setting interest rates is an inflation measure which takes no account of house prices did not react (or certainly did not react sufficiently) and house prices continued to show hyper-growth. Compare this to inflation generally (whether CPI or RPI) which, whilst higher than the levels considered "safe" did not even come close to house price growth levels (and thankfully so). The fact is people who own houses are happy with double-digit growth in their value as it means more equity and therefore, with banks happily splashing the cash, more money for them to spend now and worry about paying back later.
House prices have now fallen slightly and may, in some areas, reflect a fair value. If you look at annual house price inflation on an annually compunding basis from 1983 until today the annual rate is 6.55%. Some might not consider this too high. For the period from 1991 until 2009 annualised wage inflation on a annual compounded basis was at 4.2% (based on the LNMM index figures from the ONS). House price inflation over the same period was about 4.63%. That difference in growth could even be a statistical error.
However the real issue now is one of liquidity and equity. The FT highlights this by referring to the fact that the rebound has been effectively caused by low interest rates. But rates will not remain low forever and when they increase all those people managing on SVRs at or below the fixed rates they took out will suddenly be faced with increases in their monthly outgoings. Apart from the handful of bankers with huge bonuses most of us are not anticipating any pay inflation this year! This at a time when many other costs will have already increased as a result of the fact that we have not seen the massively overanticipated deflation. The risk is that we then see a rush to sell up and downsize to a more affordable house with the oversupply finally bringing much needed liquidity to the market and almost certainly a reduction in prices. The number of people able to buy and the amount they are able to spend is reduced due to lack of finance and so house prices will have to fall.
Therefore, triumphally declaring that low interest rates have saved the housing market from collapse is equivalent to saying that giving morphine to the terminally ill patient has saved his life. You can take away the pain for a time but eventually time runs out.

The Power of Sale - what use if not used?

I have been advising on a lot of insolvency transactions of late; now there's a surprise. One thing that does continue to surprise me is banks' unwillingness to sell by use of their power of sale. Let me explain . . .
When a bank takes a mortgage over a property it will, normally expressly in the mortgage and also by statute, have a power to sell the property. If it sells the property then not only will this automatically release its own mortgage but it will also overreach (get rid of in layman's terms) subordinate charges and other encumbrances created after the bank's mortgage and without it's consent. A sale by a receiver or administrator will not have this effect. Therefore, on the face of it a sale by the mortgagee is the most effective way to transfer the property clean. So why not always use it?
I think there are two reasons. One is incorrect and the other is a case of shutting the gate after the horse has bolted.
The first is that mortgagees are rightly concerned about becoming a mortgagee in possession as this creates a real risk of liability. This is a big reason why mortgagees appoint receivers. During the boom banks became so unused to the idea of powers of sale that they now misunderstand and think that exercising a power of sale requires a mortgagee to be in possession - it does not.
The second reason is that banks do not want the bad publicity that goes with foreclosure, repossessions, etc. They believe that if they sign the transfer deed they will be outed as the nasty bank repossessing peoples' homes.
Why is this a case of "shutting the gate after the horse has bolted"?
Well for starters I am not sure that banks collectively could do much more to damage their current reputation (rightly or wrongly) of being greedy, short-sighted and generally responsible for the disastrous global financial mess we are in.
However, on a more individual basis, does a bank really believe that hiding behind a receiver protects its reputation? Do they really believe that, when a receiver sells, we don't know that it was the 'nasty' bank that put them in place.
So come on banks, if you are going to repossess peoples' house at least have the guts to do it in openly - we know who you are anyway - at least that way the buyer has a better chance of getting a cleaner title.