This is Money Blog

Retire at 70? No chance. Our unfixable demographic problem

This demograhic problem is really coming home to roost.

It's a pet subject of mine...

- Demographic investments - I'm loving the returns (Apr 2009)
- How baby boomers will extend the financial crisis (Jan 2009)
- Demographics make emerging markets a screaming buy (Jan 2009)
- Demographics to spark a shares slump next year (Dec 2007)
- Demographics will spark a 15-yr slump, starting with falling London house prices in 2008 (Mar 2002)

...so I thoroughly enjoy these spells when the issue of population surges up the news agenda, given it is possibly the biggest and most immediate challenge facing the developed world...

- FSA boss says work until you're 70 (Daily Mail)
- Special report on ageing populations (The Economist - front page)

The problem in a nutshell

The post-war baby booms in Western economies (1945 to 1965) mean that a huge bulge in the population is transfering from contributing to the economy to taking from the economy because they are:
- Less likely to pay tax
- Less likely to spend
- More likely to use costly public services
- Certain to draw a state pension increasing pressure on public finances
- Likely to draw on stretched company pension schemes, increasing pressure on company finances

All these factors are then amplified by increasing longevity - life expectancy when the full state pension was introduced in the 1940s was around the same as pensionable age. Now it's 77 for men, and increasing by two years every decade.

The crest of this population bulge hits retirement age next year (or four years ago for women).

Before I trigger the hate mail/comments, I entirely accept that this hard-working generation deserves a well-earned retirement. I'm simply laying out the harsh reality of the economic impact.

And the solutions?

- Dramatically increase the pensionable age
- Dramatically increase immigration (a younger population helps pay for the old)

The first option is now impossible. The older population bulge also have the most votes - so no government would dare force them to work signifcantly longer. The opportunity has been lost. So open the floodgates to immigration? Again, political suicide.

So that's it. Just grin and bear it. The Japanese, who hit their own demographic wall 20 years before us in 1989, seem to have come to terms with the fact they're not constantly getting richer. Now we need to make the same adjustment.

- Andrew Oxlade, Editor, This is Money

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My buy-to-let barometer swings from plus to minus

In April 2009, I launched the This is Money buy-to-let barometer, a very slightly more sophisticated follow--up to my dismal house price predictor which, in June 2007, pointed to house price falls.

How the buy-to-let barometer works

We're lucky enough to have the strength of our content recognised by Google. So when you search buy-to-let our buy-to-let guide is the top result. So if we measure the amount of people clicking on it, we can gauge British appetite for investing in property. Admittedly, the extra variable of schadenfreude BTL searchers may have a slight impact on the results.

I combine this with Google Trends, which gives a rough idea of people searching for particular phrases.

My previous views on the market

I have written recently on how the market has a lot further to fall, if the market realigns itself with the long-term trend of prices versus average salaries.. The average UK house price - currently around £160,000 (Halifax) - should bottom out anywhere between £99,000 and £126,000.

But there's a big but... I've also warned on this blog of how the decline will be undulating - and the market could even see decent, sustained rises. Vast amounts of printed money - quantitative easing - have been pumped into the financial system. This is helping to increase the ability of companies to raise money and for banks to lend money. As I warned before, that could give a fillip to the market. And it looks ever more likely now that they are: [property market latest].

What does the not-so-dismal buy-to-let barometer suggest now?

In June, 2033 people searched 'buy-to-let' and clicked on our BTL guide. The figure spiked in January and fell and has hovered a little above 2,000 since then.
January: 3,322
February: 3,191
March: 2,969
April: 2,101
May: 2,024
June: 2,033

But that's not the real measure. That's because interest in BTL traditionally peaks in January and then falls (see the Google Trends chart below). The more interesting trend is year-on-year. So in January, the number of people reaching our BTL guide leapt 85% on January 2008. But that increased interest appears to evapourated in recent months and was actually down in June...
Year-on-year increase
January: +85%
February: +53%
March: +27%
April: +1%
May: +3%
June: -2%

The property market has benefited from renewed interest - several studies have reported price rises, some over several months. With the Bank of England still merrily pumping money into the system momentum may be sustained. Maybe a second mini-bubble will reinflate. However, confidence alone will not provide solid, long-term returns from property.

Investment bubbles are only fully deflated once nearly all investors give up all hope of the asset ever rising again. Like I said last time, we've got a way to go.

- Andrew Oxlade, Editor, This is Money

P.S. Moneybox on BBC Radio 4 have kindly asked me to come on the show for a live debate tomorrow at midday. Unsurprisingly, I'm arguing the case for the bears.

- www.twitter.com/aoxlade
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Number of Google searches for "buy-to-let"

The top 10 movies about money

Hollywood is gearing up for revenge on uber swindler Bernard Madoff, surely it is. After all, many Tinsel Town alumni - Steven Spielberg, John Malkovich and Kevin Bacon, are reportedly among those who were taken for a ride by the man behind the planet’s biggest ever pyramid selling scheme.

But retribution aside, there is a story to be told, and indeed money to be made. Given the length (20 years plus) and breadth ($64bn and counting) of the scandal, celluloid treatment must be a given.

At the end of the day, Hollywood has lavishly covered furores that don’t hold a candle to the former Nasdaq chairman’s crimes.

But while we wait with baited breath for the inevitable flick, I conducted a brief and largely unscientific survey across This is Money towers on the best movies about money, business and finance.

We ejected gangster flicks, bank robberies et al, the main stipulation was that money itself, had to be essential to the film’s plot. And that means money was almost, if not completely, a character in itself, or at least played a pivotal role in the plot and/or the environment of the story.

So, in no particular order, here’s This is Money's top 10 films about wonga:   

1. Wall Street (1987)

The quintessential cash flick. Wanting all the toys and fun that the 1980s yuppie-life had on offer, a tenacious young stockbroker Bud Fox, (Charlie Sheen) is taken under the wing of scruples-free financier Gordon Gekko (Michael Douglas) and as a result gets involved in such goings on as shadowy business deals, insider trading and generally the type of naughtiness that’s frowned upon by the authorities. Oliver Stone’s classic is also noteworthy for the depiction of brick-sized mobile phones. And a sequel is on its way.

Key quote

Gordon Gekko: ‘The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works.’

*Buy it here

2. Trading Places (1983)

Set-upon but over-privileged broker Louis Winthorpe III (Dan Aykroyd) and street hustler Billy Ray Valentine (Eddie Murphy) take on spiteful millionaire commodity traders Mortimer and Randolph Duke in a bid to make a fortune and send the pair into poverty, all by dabbling in the glamorous world of orange futures. Yes really.

Key quote

Louis Winthorpe III: ‘You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?’

*Buy it here

3. Glengarry Glen Ross (1992)

No doubt put millions off a life in the seemingly lucrative business of real estate. This anti-American dream allegory depicts the hell of working for the titular US firm, where backstabbing, ritual humiliation and failure are all in a days work, as a ruthless boss, Blake (Alec Baldwin), piles on the pressure and then some.

Key quote

Blake: ‘A-B-C. A-Always, B-Be, C-Closing. Always be closing, always be closing!’

*Buy it here

4. Boiler room (2000)

Seduced by the promise of enormous wealth by young millionaire Jim Young, (Ben Affleck) college dropout Seth Davis (Giovanni Ribisi) naively joins a firm of crooked stockbrokers, J.T. Marlin, whereby he leaves his morals at the door and is fast-tracked to super-salesman status, until the FBI come knocking, that is.

Key quote

Jim Young: ‘Anybody who tells you money is the root of all evil doesn't f**king have any.’

*Buy it here

5. Rogue Trader (1999)

Former ‘trainspotter’ Ewan McGregor, swapped smack for cash in this biopic of the notorious Barings Bank trader Nick Leeson. While his employers believe he is one of their hotshots in Jakarta, Leeson is in fact losing money hand over fist and covering it all up. Leeson’s creative accounting eventually brought the bank to its knees and put the ‘wide-boy’ trader behind bars.

Key quote:

Nick Leeson: ‘I, Nicholas Leeson, have just lost 50 million quid, in one day’

*Buy it here

6. Risky Business (1983)

Squeaky-clean US teenager Joel Goodson (Tom Cruise) is left the keys of the kingdom while his parents go on holiday. But during his few days of blessed freedom, following a dalliance with call-girl Lana, he manages to drown his father’s beloved Porsche in Lake Michigan. In a bid to drum up the cash to repair the car, he goes ‘pimp’ and turns his parental home into a den of iniquity for the weekend.

Key quote

Joel Goodsen (regarding Lana): ‘It was great the way her mind worked. No guilt, no doubts, no fear. None of my specialities, just the shameless pursuit of immediate gratification. What a capitalist.’

*Buy it here

7. Hudsucker Proxy (1994)

Back in the mid-nineties, the Coen ‘No Country for Old Men’ Brothers dipped their zany toes into the murky world of business. Following the suicide of the Hudsucker Corporation boss, gormless post-room worker Norville Barnes, (Tim Robbins), is rocketed to the status of company President by scheming director Sidney J. Mussburger (Paul Newman), who believes the feeble Barnes will drive the cost of the stock down so he and his greedy cohorts can scoop it up at a bargain basement price and take over the company. Unfortunately Barnes invents the hula-hoop and the group’s shares rise quicker and louder than a 10-year-old on Christmas morning.

Key quote

Sidney J. Mussburger: ‘One month; to make the blue chip investment of the century look like a round trip ticket on the Titanic…What we need now is a new president who will inspire panic in the stockholder.’

8. American Psycho (2000)

The film adaptation of Brett Easton Ellis’ classic piece of 1980s fiction, is anchored by anti-hero, investment banker, Patrick (‘I’m in murders and executions’) Bateman (Christian Bale), who has a lively penchant for slicing, dicing and even chain-sawing all who cross his path. The film easily sits as the ‘darker’ cousin of Wall Street, (same period – same place) and effortlessly depicts the shallow, soulless vacuum of 1980s high-flyers in New York’s financial district, where image and the bulge of your bank balance are everything.

Key quote

Patrick Bateman: ‘I have all the characteristics of a human being: blood, flesh, skin, hair; but not a single, clear, identifiable emotion, except for greed and disgust.’

*Buy it here

9. Slumdog Millionaire (2008)

The multi-award winning Mumbai based fairytale finds 18 year-old orphan and ‘slumdog’ Jamal as a contestant on the Indian version of Who Wants to Be a Millionaire, with his lessons and experiences of life guiding him through the answers. But is he interested in the millions of rupees potentially heading his way? Apparently no. It’s merely a ploy to reach out and rescue, Latika, the girl whom he loves but has lost. However, despite being questioned, interrogated and then tortured, for suspicion of cheating, it all comes good in the end as Jamal goes the distance, after which, his lost love comes a running. No doubt the same would have happened had he run out of lifelines and washed out after question four. 

Key quote

Who Wants to Be a Millionaire presenter, Prem Kumar: ‘A few hours ago, you were giving chai for the phone walahs. And now you're richer than they will ever be. What a player!’

*Buy it here

10. Brewster's Millions (1985)

Montgomery Brewster (Richard Pryor) is a small-time baseball player, set a task which in this day and age, the Paris Hilton’s of the world could do in a single morning – he has to squander $30m in just 30 days, because if he does, he’ll inherit $300m from his eccentric relative.

Key quote

Montgomery Brewster: ‘Gentlemen, do you think I'm a lowlife?’ Tailor: 'Oh no, Mr. Brewster. Not with these clothes.'

*Buy it here

- Philip Scott, (resident film buff),This is Money

Will Tesco buy Northern Rock and why would it?

Will Tesco buy Northern Rock? A report in today’s Times claims the supermarket giant has expressed ‘provisional interest in buying the bank’.

There's nothing really in the report backing up the story, so essentially it's a rumour, although a Treasury source is there giving a steer on offloading the Rock.

But it would certainly make sense for Tesco to nab itself a bigger slice of the UK banking pie, as it is pushing hard to expand its bank having bought out RBS’ 50% share of joint venture Tesco Personal Finance.

But will this latest report turn out to just be another 'Northern Rock to be bought' red herring?

There have already been plenty of rumours circulating about bidders for the collapsed bank, taken into state control last year after months spent trying to find a buyer. The list of those, along with Tesco, who reckon they could make a go of the bank includes Sir Richard Branson and private equity groups.

But, if no one wanted the bank enough to take it over at a knock down price as it floundered early last year, why would they want it now?

Well, the Government is pretty much a distressed seller, it is strapped for cash and would dearly love to be able to turn around and say 'we made a success of the Northern Rock rescue' before the next election. This theoretically means a canny buyer could potentially name the price and conditions.

The problems our big banks still face is that they got too clever for their own good and rushed gung ho either into investment arms that they believed could never fail, or ramping up their mortgage books on foundations made of sand. But strip away these problems and retail banking is a highly profitable industry.

In April, Tesco revealed record profits of £3.13bn profits: to make this cash it has to run a colossal global retailing organisation.

In January 2007, before everything went catastrophically wrong for it, Northern Rock announced profits of £588m: it was just a UK-based mortgage lender.

Obviously, you would hope, Tesco wouldn’t be pursuing the madcap money market strategy that led to Northern Rock’s collapse, and it shouldn’t need to. It has increased the amount of savings deposits it holds from £2.5bn in mid-October 2008 to £4.5bn this spring, has struck a new insurance deal, and is priming itself for a launch into the mortgage market that should pick up steam as the housing market recovers and interest rates rise.

So that’s why Tesco could want Northern Rock, and why Virgin could too and others also reckon they could make a go of it. The UK banking sector is hamstrung by bad debts, taxpayer investment and a lack of trust, so there are potentially very rich pickings for any fresh blood entering the market.

The only problem is that surely the one lesson to learn from the crisis has been that banks mustn’t be too big to fail. And does a bank owned by the country’s biggest supermarket and retailer not also fall into that too big to fail pot?

- Simon Lambert, assistant editor, This is Money

- How Tesco and Virgin can be the new giants of banking

- Video: Supermarket banking - will it work?

We have the rail system that we deserve

As a nation of whingeing motorists the British public has no right to lament the latest twist in the debacle that is the UK rail system.

For decades the great British motorist has made it perfectly clear where his priorities lie: with driving his own little car – usually on his own and not so little – exactly wherever and whenever he likes. He wants more roads and cheaper petrol and lower road tax.

Each hint that the motorist should pay more and the selfishness turns to anger – either at the pumps or at new road tax measures or at traffic wardens or at speeding cameras.

'I wouldn’t mind,' the put-upon sigh goes up, 'if the revenues went towards better roads.'

Motorists pay a fraction of the real social and economic cost of driving. No other private pursuit is subsidised in quite the same way; no other luxury has come to be treated as a necessity with such a disastrous outcome for the standard of living in this country.

'But it IS a necessity for most of us,' the angry cry goes up. 'Public transport doesn't exist where I live. It's so bad and expensive it forces us into cars.'

Well that might well be the case on a day-to-day basis - but it is not a carte blanche out of individual responsibility.

Where was your anger over rail privatisation? Where was your anger over successive train fare increases? Where was your anger over station closures and poor service and management bonuses and rail disasters that cost dozens of lives?

Compared to the regular uproar over the poor old driver being hit in the pocket again, I seem to remember an overwhelming indifference. If you’ve ever complained about rising road tax or petrol tax or parking fines or speeding fines – then you are part of the collective attitude that has ushered transport in this country into the dark ages.

Public transport is in the state it’s in because as a nation obsessed with the motor car, we have gladly allowed it to become so. 

Those staring forward bright-eyed from motoring’s golden age of the 1950s and 1960s might not have been able to foresee the dysfunctional and I would argue dystopian outcome that the switch from train and bus to car would bring about.

But it's been the elephant in the room since the mid-1980s and we have stood around doing precisely nothing about it. And we haven’t even started paying for it.

- Adrian Lowery, Assistant editor, This is Money

Mandelson: The champion of laid-off bank workers

Looking askance of the Mansion House while commuting home yesterday, one might have mistaken it for some kind of upmarket brothel: a trickle of tuxedoed gentlemen scuttered through its side-entrance from their cars, heads low, no loitering at the entrance for fear of being seen.

But no, it was the annual British Bankers’ Association dinner, where the armies of lower-paid banking riff-raff strolling home in the sweltering heat – some of them Lloyds workers laid off today - found an unlikely champion in the form of Lord Mandelson, while their bosses quaffed wine, steak and raspberry crumble, but didn't tuck into humble pie.

The mood inside was jovial, with the outside world blocked off by gilt and neo-classical decoration. The head of the BBA, Angela Knight, looking resplendent in dramatic evening grown, remarked to the crème de la crème of the banking industry and the odd journalist that, since the room contained two of the most reviled professions in the industry, perhaps she should ask along some estate agents next year.

Cue some hearty hurrahs, followed by her argument that if UK banks have to hold larger amounts of money in their coffers to buffer themselves against a crisis, then other countries should have to do the same.

There needs to be better supervision in the financial services industry, she added, but there was still the habitual passing of the buck: it wasn’t just banks that lent people too much money that caused a crisis, there was the Government and the regulator, the Financial Services Authority, each of which had a hand in it all as well.

After grace had been said, which involved asking the good Lord for confidence to return to the banking industry, it took the figure of the business secretary, Lord Mandelson, to answer the prayers of thousands of laid-off bank workers by giving a tacit rebuke to their betters.

He said: ‘I want to acknowledge the thousands of workers in the banking and finance sector who have lost their jobs over the last year. Most of whom didn't have large pensions to look forward to.’

This from a man who has more titles than perhaps anyone in the room, a once stalwart champion of the City’s bonus culture. The heresy of it all.

He added: ‘We are convinced that the status quo ante is not an option. The Financial Services Authority and the European Union are both going to get a new rulebook. Things are going to change.’

Applause, desert, then back to the parlour for drinks. Glasses chink, a joke or two does the rounds. Elsewhere in the city, the families of bank tellers wonder how the year will end.

Alan O'Sullivan, This is Money

Fixed mortgage rates to fall? Don't bet on it

A lunch meeting gave me an interesting insight into the direction of fixed-rate mortgage rates yesterday.

In early to mid-June, our interest rates round-up warned that City traders were taking an outside punt that the Bank of England may raise the bank rate before the end of the year (the wider economic consensus is that rates will stay at 0.5% well into 2010).

At the same time, experts warned that 'swaps', one market for borrowing which heavily influences the price of fixed-rate mortgage offers, were edging up. Fixed-rate mortgage deals duly followed upwards.

However, I meet with a guy who knows his mortgages. Francis Ghiloni has recently helped set up the www.realpricecomparison.com, which shows full mortgage comparisons. He has lots of experience and a vast knowledge of how the industry works.

He pointed out that swap rates have fallen back again in recent weeks and are, in fact, lower than they were a month ago. So the lenders have presumably passed that on with cheaper rates? Er, no. And Ghiloni suspects they won't, with banks and building societies happy to scoop up bigger profit margins in the meantime. Competition in the mortgage market ain't what it used to be.

So should you fix now or wait? It should be a personal choice rather than a market call [how to decide to on fixed-rate mortgages]. Ghiloni faces the decision personally. 'I won't fix now,' he says. 'I'm waiting for more competition to enter the market.'

Let's hope it does.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

Other posts
- How to decide on fixed rates
- 'Expect rapid rate hikes!' - they wouldn't dare

The new career booster: Work for nothing

How not offering to work for free can have a harmful effect on your job security...

The world's first stock market-listed voluntary organisation, otherwise known as the airline British Airways, asked its staff to work a month for free in a crass attempt to bolster the company's financial strength.

 In all, 800 BA workers - with cabin crew on an average £29,000 - have agreed to work unpaid for a monthand another 6,200 will take a pay cut. Some 1,400 more will switch to part-time. In all, £10m will be saved.

  At first glance the high response is surprising (I was even more surprised by a pollon our site found that 35% of readers would work for nothing) but in reality, these 'volunteers' are saving not only their company but their careers. Can you imagine if, in the next wave of redundancies, the management attempted to get rid of any worker who had bravely stepped forward before to work for nothing. As a journalist, I'd run a story on such an injustice.

The real injustice, of course, is that it heaps pressure on those who had the temerity to expect to get paid for going work.

The plan was crass but it was successful, financially but not morally. Expect to see the same at a plc near you soon.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

 

Deflationwatch part III: what is getting cheaper?

Prices are falling right? After all May's figures showed the third successive month of RPI deflation, but for some reason everything still seems to be managing to get more expensive.

So here is Deflationwatch part III: an ongoing look at the figures that reveal what exactly is getting cheaper (Hint, not a lot).

First the inflation report in a nutshell:

Inflation figures for May showed the third successive month of Retail Prices Index deflation, at -1.1%, this was a smaller 12-month price fall than the 1.2% seen in April.

Yet again Consumer Prices Inflation remained above the 2% target at 2.2%, but eased back a little from the 2.3% seen in April.

Again the ONS report reveals how the report is being skewed by an exceptional cut in interest rates and last year's petrol price spike.

It said the main deflationary forces were mortgage costs and motoring expenditure. Clothes, shoes and leisure goods also pulled down RPI, but all the stuff many need on a daily basis, such as food, electricity and gas and fares and other costs rose.

Here's the RPI figures:

Here's the CPI figures:

- Deflationwatch part I - What exactly is falling in price?

- Deflationwatch part II - We could do with some real falling prices

- Simon Lambert, assistant editor, This is Money

How much of a property's asking price should you pay?

If you’re buying a property, how low below the asking price should you expect to pay?

This is the ever present dilemma facing any potential homebuyer and despite an almost two-year long property slump, the asking prices people put their homes on the market for regularly astound me.

As a general rule my mind works on the knock off 10% and you’ll get a fair selling price principle.

However, this so often leaves me at the point of thinking something is still overpriced that I figure many sellers take their most hopeful expectation and then add at least an extra 10%.

New figures from the Royal Institution of Chartered Surveyors show its members reporting that the average home is currently selling at 11% below asking price.

It said that the gap between asking and selling prices was narrowing. In Scotland there is the smallest room for manoeuvre, with homes typically fetching 97% of the asking price, while in the North there is a gulf between expectation and reality, with homes going for 74% of the asking price. London properties go for 93% of the asking price.

So, in theory an average buyer should be hoping for at least an 11% discount on a property and the 10% principle is reasonably accurate.

Unfortunately, it’s never that clear cut though and you need to factor in everything from whether the estate agent is greedy or desperate, to whether the seller is a glass half full or half empty kind of person.

My tip would be to go in 10% below what you consider a fair price – but be realistic and don’t make it offensive – and then work up in small steps while letting the seller know you are serious.

And just to spell this out, I mean 10% below what you think is a fair price. So, not the asking price, or even what the seller considers a fair price, but what you consider to be the fair price. If a property is on the market at £330,000 and you think £300,000 is a fair price then you go in 10% below that, so £270,000.

Any form of optimist/pessimist test you can subtly carry out on the buyer and check on what the estate agent is driving (to measure their confidence) could also prove useful.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis