This is Money Blog

The true cost of food anyone?

My local market has a tray of strawberries for £1.

My local supermarket, Sainsbury's, has the same size tray for 'Half price'. Not £2.99 but £1.49.

For my maths, that makes Sainsbury's 50% more expensive not 50% less.

Any cynic will tell you that the recent hike in food prices is not reflected in the official inflation figures but the reality is not helped by the marketing departments at supermarkets whose job is to pull the wool over their customers' eyes even more.

I think we need to prepare for a lot more of these kinds of ruses over the coming months.

Here's some reasons why...

City focus - rising cost of food

Food prices rise fastest in 14 years

What is the real level of inflation

See what our readers think about the inflation figures

Tips for cutting your food bill

How I caught Tesco on a 2for1 sham

Tesco accused of sham 'half-price' veg

And from December 2006
Inflation 'four times' official rate

Richard Browning

House prices peaked in 2003 - expect them to return there

The shine is starting to come off the housing market. For me, the only issue this raises is a question: why didn't it happen a long time ago? The idea that house prices could continue rising for ever is an absurd proposition but one that has been palpable in the minds of far too many people for far too long. The question now is: how low can they go?

We can all pontificate and speculate using economic models, historic similes and fancy jargon. But I want to tell you a little story.

In the first few months of the new millennium I was working on a major web launch and we were looking for themes that summed up the state of the nation. News, fashion, sport, celebrity, the usual suspects, but there was something missing. We needed to tap further into the zeitgeist than B-list celebrities and football. Checking the mailbag it became obvious. People were starting to seriously worry about their debts. Brilliant. We'd launch with a big get-out-of-debt campaign. That was in early 2000.

Now, for various reasons the web project was shelved - along with our debt campaign. But that didn't matter any longer because within a year the mood of the country had changed. The Bank Rate (formerly the Base Rate) remained steady in 2000 but by early 2001 it began its steady decline. Money was becoming cheaper and cheaper. Previously rational people were drawn into a crazy borrowing binge, egged on by brokers, banks and other lenders and goaded into taking more and more credit by self-appointed money experts.

Suddenly, it seemed that everyone where I live had gone out and bought a new car or two. Other people were having new kitchens and Roman-style bathrooms installed like they were going out of fashion, which incidentally, they now are. Builders were adding extra rooms to homes, where previously they would have been deemed illegal. It became impossible to get a plumber to visit unless you were looking to install an entire new central heating system.

But pay wasn't rising by anything much above inflation. So where was the money coming from? From house prices, of course.

By now I was development editor of This is Money, working not at head office with the other journalists but in the development hub in 'new media land'. It was exciting and we were creating things that had never been done before with a talented young team, staffed by college leavers and other, well, let's call them first-time buyers.

Being the only person from the money team in the building, conversations often turned to money-related issues. It was great to see people taking an interest in such matters. But increasingly the conversations were not about the stock market and interest rates but about debt. Not about how to get out of it, but how to get more.

The country's collective attitude to debt had completely changed. Never mind that it could take a lifetime to clear a £30,000 credit card debt and that anyone with common sense should try to live within their means, that was irrelevant for people leaving university with up to £15,000 debts to show for their education.

Over the next couple of years, some of these youngsters had not only bought their first flat but within six months of doing it had remortgaged to buy stuff and go on holiday on the back of the rise in its value.

It wasn't just youngsters, of course; everyone seemed to be at it. But what happened next would affect the youngsters most and by 2003 they were in a fix.

The credit boom was over. House prices had peaked. The cost of a one-bedroom flat was now out of reach of the average first-time buyer on the income multiples that sensible lenders were prepared to offer. It was time to settle down and wait for wage inflation to close the gap and breathe life back into the market.

But it didn't happen that way. Word soon spread around the office that someone had secured a loan with Standard Life Bank (it could have been any of the banks but this is how it happened). It was a loan based not on income but perceived affordability. It didn't take long for everyone trying to break into the housing market to contact Standard Life or a mortgage broker to try to get hold of bigger and bigger loans.

By now even the local newsagent was advising his customers on how they could get into the housing market as a first-time buyer and as a buy-to-let investor - a sure sign that the boomtime was over. But it wasn't.

Estate agents were pricing homes on a see-what-we-can-get-away-with basis. And with lenders willing to lend just about anything to just about anyone - even the unemployed and people prepared to lie about their incomes - the boom continued for five years.

And so here we are now, in March 2008, and it's over. The loans made to people without a hope of paying them back were packaged up as investments and sold off by bankers (an even greedier element of the financial system than any estate agent or unscrupulous mortgage broker). And no one knows the extent of the impending damage we're about to face. What we do know is that personal debt is off the scale and it's pay-back time.

How far house prices will fall as a result of this recklessness is anyone's guess. I'd say any gains made since 2003 on a property's 'value' are a bonus that we should expect to lose. And to borrow a phrase much quoted by those people who believed that house prices were going to keep on rising for ever: 'This time it's different.'

Yes, you're right. This time it is different. This time it's carnage.

Richard Browning

Related

Financial crisis puts crunch on home loans

Estate agent reveals dirty tricks

Brokers banned for false mortgage applications

Please note: Yes this is one-sided. It is my opinion. Here's one I wrote two years ago:

Doomwatch: house price storm is brewing

The new property craze - knock 'em down, build 'em up

The credit crunch is currently sweeping all before it in the nation’s media – allowing for brief excursions into Home Secretary buys doner kebab and Britney goes doolally territory.

But out there in the suburbs no one’s listening, because there’s a new craze sweeping commuterland – buying houses and knocking them down.

While warnings of financial doom echo around them, the wealthy citizens of the Home Counties are busy snapping up properties, demolishing them and putting something a lot more opulent in their place.

This trend is similar to the garden grabbing movement, which specialises in buying up nice spacious detached homes with large gardens, knocking them down and putting more homes on the plot. But while garden grabbing can fulfil the property developer instincts of the suburban empire builder, it makes properties smaller and so doesn’t meet the status requirements needed when securing a place to live.

The answer therefore is to buy one of the detached homes built between the 1920s and the 1960s when developers believed in rooms large enough to open a wardrobe door in and gardens big enough to kick a ball in.

Then you knock it down and build your dream home.

If you want proof of this craze just visit the council planning website of a desirable town round London, or better still find the local paper property listings. The key phrase to look out for is ‘potential to extend and improve subject to planning permission'.

My parents live just outside Harpenden, near St Albans, classic buy a big house and knock it down territory. Flicking through the local papers, the amount of planning applications going in, or houses subtly suggested as ripe for demolishing is staggering.

But even more amazing is the price people are paying before indulging in their new-build dream. Homes are being bought to be demolished for £1m-plus, with the buyers then looking at a £300,000 - £400,000 rebuild, landscaping and fitting out costs.

Rising from the ashes are what could be described as houses from the mock Victorian Mansion school of architecture, or maybe New Doll’s House school would be better.

Essential features are a couple of gable ends, an imposing drive for the baby Bentley, some big iron gates, enough outside lights to land an aircraft and an en-suite bathroom for every bedroom.

Now this isn’t meant to sound snobbish or churlish, although surely an en-suite for every bedroom in a family home is a recipe for never-ending parental cleaning.

In many cases these properties are an improvement on what was there previously - even if they do have a tendency to be imposing and all look slightly the same.

However, the knock ‘em down, build ‘em up craze is fascinating considering the general economic outlook at the moment and shows that while people might be starting to feel the pinch there is still a hell of a lot of money out there. There has to be for people to be paying top whack for luxury homes, only to knock them down.

Our typical New Doll’s House developer is a well-paid company director, lawyer or City worker, in their 40s or 50s. They have made a nice profit on their past 15 – 20 years of home ownership, have a healthy £500,000-plus in equity and a mortgage similar in size to most first-time buyers. They are happy to spend some bonus and take on a bigger mortgage to fund their new dream home and don’t plan on moving for at least five to ten years, so believe they can ride out any property storm.

An Englishman’s home is his castle - owning a big deluxe family home is what people aspire to.

The wisdom from the sceptics may be to sell up and rent for a while, but it’ll take more than a salvo of bearish warnings to change the nation’s psyche.

- Simon Lambert, This is Money

Useful links:

Analysis: Will there be a house price crash?

Mortgages and property news, tips and advice

Video: Britain's debt problem

I nice early start today, doing my bit to keep the City's finest up to speed on the consumer attitudes and appetite for debt among Middle Englanders: an interview with TV channel CNBC.

If you have the time, here's a five-minute clip on the CNBC website...

http://www.cnbc.com/id/15840232?video=624252791&play=1

As ever, feel free to publish your own comments - tell me what you think of Britain's debt addiction in comments below.

- Andrew Oxlade, Editor, This is Money

The new barometer of High Street misery?

The recent turmoil in the financial markets and this week's plunging Marks & Spencer share price has reminded me of an oft-forgotten adage that goes something like this: don't invest in what you don't understand.

It's basic commonsense advice that the morons in the banking industry who have taken the Western economy to the brink by creating collateralized debt obligations and other instruments of credit crunch would have done well to adhere to.

And it's a rule that I try to live by, which is why I would never invest in retail shares.

I don't understand retailing. Why anyone would choose to go into a shop and buy things is a concept that is simply beyond my comprehension.

I hate shops. And I hate shopping. My former local butcher was a rude ruddy-faced misogynist with few manners and missing chromosomes - and he had knives. What's the motivation for anyone to enter an establishment for verbal abuse and sausagemeat? I don't get it.

Unfortunately, you cannot get through life and avoid shops entirely. I tried that one.

On the plus side, this simple fact makes retailing an easy sector for investors to follow. To get a snapshot of a company's health you can wander in off the street and see whether it's full of happy people buying stuff. Or not...

Increasingly, people are running out of the credit that has sustained the shopping boom of the past few years and, as Marks and Spencer has found, people aren't buying like they used to.

Walk into a store now and what you see are not legions of happy shoppers but whole private armies of security personnel charged with preventing now-penniless customers from trying to feed their addiction for off-the-peg clothes and food - without paying for it.

It's a phenomenon that has led me to consider and now create a new barometer for measuring the state of the High Street: the Security Quotient.

Now, I like security guards. A bit. For two reasons. First, behind the uniform there often stands a proud person who has been led on a fascinating journey through life before reaching their destination: the door of that shop. Second, a security guard once apprehended a would-be car thief who was trying to hotwire my Ford Escort 1.6.

But, I sense the industry is getting out of control and is only going to get worse. Bring on the new barometer.

If I had used Security Quotient I could have easily predicted that M&S shares were heading for a serious tumble. If you walk through the store close to our office (admittedly it is a popular shortcut for the Tube station) you face a gauntlet of armed* warriors trained and primed to tackle the slightest social misdemeanour like looking at the racks of old ladies' clothes in the wrong way. That's the sign of a worried company. Security Quotient: 8. Shares down almost 23% this week.

Sainsbury's on the other hand has relaxed its ludicrously over-the-top security presence at my local branch, Quotient 4, sales up over Christmas. Sales were also up at Asda, Quotient 3, which has always appeared less keen than rivals to treat customers like criminals.

You can't invest in Boots. It's just as well. I was chased around the store all the way from the antiseptic creams to hot water bottles by a security man keen to make sure I never go in the store again. I swear he was tugging a Rottweiler. But that might have been my festive head playing up. Quotient 9.

Tesco is peculiar. The Kensington store has a guard right by the door but they've thoughtfully provided him with a big telly to watch all day rather than the customers. This offsets the over-the-top presence on the lower floor. Quotient 6, sales up.

And so finally to PC World. I've saved the best till last.

The guard at the Kensington branch of PC World has his own stage, on which I believe the 02 arena was moulded. From here he controls eight million spy cameras and oversees a series of electronic gates. I wouldn't be surprised if they scan your iris as you enter. I would be surprised if anyone ever shops there.

PC World can, therefore, proudly lay claim to a full Quotient of 10. A feat backed by the performance of shares in its parent company, DSG International, now down more than 60% over the last year.

This may all be rather frivolous stuff but next time you're in store check the Security Quotient then check the share performance. I may be on to something.

Richard Browning, This is Money

Now read this

Retail woe gives shares the jitters

or this

Bloodbath and boom of the High Streets

and, of course

PC World's adventure shopping experience

*armed with walkie talkies

House price crash 2008 - will the bears be right?

At the start of the week I had a call from ITV’s Tonight show asking what This is Money’s house price prediction for 2008 was?

As I had made that 2-3% increase prediction two months ago, I was also asked if I was sticking by it.

Now that was a tricky question. I made the prediction back in mid-November and even then it was fairly optimistic – since that time a further barrage of bad news has landed on the doorstep and house price crash looks like being the financial catch phrase of 2008.

Here at This is Money we have asked the crash question ourselves and any property news is being snapped up at the moment.

What has been fascinating is the depth of feeling aired in our reader comments. There are a lot of angry punters out there and a fair few campaigning for a full blown house price crash.

Of course, house price crash is a cliché, but it is a handy one and tempting to use. What actually happens as house prices slow is a big drop in transactions and a steady drip of small monthly falls, as a gap develops between what people think their home is worth and what others are willing to pay.

‘House price crash is a far overused phrase,’ Capital Economics property economist Ed Stansfield, told us when we asked him the big question for This is Money’s Where next for house prices? video.

Instead, he says past evidence suggests the housing market adjusts slowly, as property is not a liquid asset and a stock market-style crash doesn’t happen.

An easier thing to measure is sentiment - and this has changed dramatically over the past year. Over three weeks in December 2006, 55% of people said house prices would rise in the next 12 months. Over the same period in December 2007, 75% predicted a fall in the next 12 months.

This may be a straw poll measure, but it displays a remarkable shift in mood. It is not completely unexpected, however. In May, a This is Money poll showed just 41% of people thought prices would rise over the next 12 months.

Writing about that result and the prospect of a property slump, I commented: ‘The important thing though is that it doesn’t really matter what the experts or the doomongers think – house prices are dependent on what the public thinks.

‘So will prices crash? It’s unlikely when there are still 41% of people out there who think they’ll rise. But if confidence takes the same hit in the next six months and another 14% lose their faith, then there would be only be 27% believing prices will rise and that could spell a serious problem.’

Six months down the line that has happened, so should I revise my prediction of a 2% to 3% increase in prices?

Probably. But I’ll keep it for now. Firstly, I did qualify it with the words ‘making predictions is a mug’s game’ and secondly believe that if you are going to make a forecast you should stick with it for longer than two months.

Certainly on current evidence even low growth looks tough and the tightening of borrowing criteria by banks and building societies means the cheap money that has driven house prices upwards is no longer widely available. But there are supporting factors out there. My house price prediction takes in the whole UK property market and there is pent up demand and areas where I think inflation will be high enough to keep average annual prices going up slightly.

However, even my predicted rise of 2% would still see property essentially stagnate and lose value in real terms due to inflation, which is likely to be higher itself.

I think that’s going to continue for a while, as 2007 was the year that property became unaffordable. Stagnating house prices will be a good thing – even for those like me who have bought a home in the past two years - because one day we might want to move somewher bigger and need someone to buy our home.

Oh, and the sooner we get away from this obsession with our homes as a cash cow the better.

- Simon Lambert, This is Money

Useful links:

Analysis: Will there be a house price crash?

Mortgages and property news, tips and advice

Al Bangura: When money doesn't mean anything

This isn’t about money. I’m sticking this warning in because it isn’t strictly This is Money territory and it's about an instance where money means nothing.

Alhassan Bangura, a 19-year-old football player for Watford - the team I support - this week lost his Asylum and Immigration case to stay in the country and faces deportation back to Sierra Leone.

Al Bangura arrived in England four years ago, to escape the civil war in his country because his life was in danger due to his late father’s connections to the Soko cult in the country. After his father’s death, its elders threatened to kill Bangura after he refused to join and take part in its rituals of withcraft and mutilation.

He fled his home and a Frenchman who found him sleeping rough in Guinea trafficked him to London via Paris in 2004, when he was aged just 16. He was then taken to a house where two men attempted to rape him. Bangura escaped and was found in the street by a passer-by who took him to the Home Office’s immigration centre in Croydon.

He underwent therapy to help him deal with his ordeals and began playing non-league football where he was spotted by a Watford scout.

Since he signed for Watford, Bangura has been a great player and fan’s favourite. Al became a father less than two weeks ago. He says he feels more English than from Sierra Leone and his ambition is to play for England.

He was originally given indefinite leave to stay in Britain. However, the Home Office has decided that Bangura shouldn’t be here anymore and wants to deport him back to Sierra Leone.

As part of its evidence at the tribunal it accused him of lying, as he told the Watford programme that he came to England with an uncle he trusted called Eric. This was rather than tell fans a man tried to traffic him for use as a sex worker and that he was almost homosexually raped – hardly the kind of thing a footballer would tell in a culture where no player dares to admit they are gay for fear of opposition taunts.

Al can appeal the decision and needs as much support as he can get to continue living in the country where he has built himself a life with a family and a job.

His problem illustrates how money isn’t the solution to everything and puts a bit of perspective on stories abour credit crunches, house prices and interest rates. This is a someone who escaped a war torn homeland as a child, built a new life in Britain and has become one of the privileged elite – a professional footballer with a six figure salary and all the trappings that entails.

Bangura has played in the Premiership and despite being only 19 has tasted wealth and a life that most others can only dream of – but that will mean nothing if he is sent back to Sierra Leone.

Next time you see an article about asylum seekers or immigration think about Al's story. In the best circumstances most people who come to Britain arrive to work and do well, and in the worst they arrive after trauma most people could never imagine.

There are hundreds of people out there like Al Bangura who could have their lives torn apart and be deported back to homelands where they are in danger of being killed. His case has gained publicity because he is a professional footballer – enjoying the fame and fortune that brings.

But this isn’t about money - this is about someone’s life.

- Simon Lambert, This is Money

Useful links:

Sign the petition for Al Bangura here

>> US eyes Premier League football

>> Premiership pay average hits £1m

Sex, population and the predicted share crash of 2008

In 2002, I wrote in the London Evening Standard, This is Money's sister title, about an appealing theory that claimed to accurately predict the future for the stock market. The prediction? US shares would race higher before beginning a decade-long slump in 2008. UK shares would be close behind...

'Investors should brace themselves for one of the most powerful rallies the UK has ever seen before the stock market falls into a Japan-style recession that could last for a decade or more.  A slide in London house prices, starting from about 2008, is expected to be the first sign that the good times are over in the UK before the economy - and share prices - languish until at least 2022.

'The theory goes that a tidal wave of babies born after the Second World War is reaching the optimal spending age of 46 - couples begin to spend more because their children fly the nest. In marketing circles, it is known as the Harley-Davidson effect: the biggest buyers of the bikes are men in their fifties. This spending drives the economy and, therefore, stock markets.'

London Evening Standard, 8 March 2002

So crudely, the theory is based on sex. More accurately, it relies on demographics to forecast changes in the  economy and share prices.  

Harry S. Dent, leading cheerleader of the theory in the US, used demographic charts to predict the Nineties shares boom with startling accuracy. This explanation and chart sets out his theory.

He was also able to correlate Japan's ageing population with a bear market for the Nikkei shares index from 1990 to 2004/05.

He then pored over his graphs and predicted an unprecedented shares boom for the US and other western economies - he wrote a book called The Roaring 2000s.

When I wrote the Evening Standard article in 2002, the theory was falling down. Shares had, in fact, slumped, post-dotcom boom. However, it turned out to be a temporary correction and share prices have since risen rapidly, although nowhere near as spectacularly as Dent predicted (in the Nineties, he set a 30,000-point target for the Dow - its current level is around 13,500 points).

But the underlying trends were right, with the longest sustained growth in economies both sides of the Atlantic.

The theory has a bigger fan-base in the US. But there are also some British demo-zealots - Alan Steel, an Edinburgh-based financial adviser and demographic hobbyist, still avidly follows Dent's updates. He suggested I point out to readers the Office of National Statistics graph on demographic structure (2006), which perfectly illustrates the baby boom in the UK which first came after the war but then came through in a much stronger wave in the 1960s. By far the larger baby boom was in the Sixties (pictured).

The demographics orginally suggested the rot would begin in the US in 2008 and a few years after in the UK (the difference is down to GIs returning quicker than British troops who were stationed longer after the war in Europe). So we should expect a few more years of sparkling gains before the slump, which, the charts say, will last beyond 2020.

The most recent Dent update in 2006, however, put back the decline to 2009 'when oil prices hit $100'. Note: the price of crude was a whisker away from $100 a barrel last month.

So should we trust the theory? Should we follow the advice and ditch our general holdings to buy shares in health and pension companies (that will benefit from the ageing population), and funds that invest in emerging markets with young populations, such as Latin America? Should we all buy bungalows in Bexhill?

My previous attempts to prise a new UK assessment from Dent have been fruitless. The organisation is entirely US-focused. I'll be trying again in coming weeks. I'll also talk to experts about the impact of globalisation and immigration on the theory - especially given the recent influx of more than a million people to British shores.

And in my next blog post, I'll also give details of a worrying indicator that accurately predicts house price crashes: it's flashing red for the UK and 2008.

- Andrew Oxlade, Editor, This is Money

>> Financial predictions for 2008

>> FTSE 100 'could fall 1,200 points in 2008'

How I caught out Tesco on a two-for-one sham

Gotcha Tesco. I have caught Tesco plugging a two-for-one offer that is a sham.

Everyone knows supermarket pricing is a dark art, but it is notoriously difficult to prove. Two-for-one offers, bottles of wine reduced from a price rarely seen, comparison price wars – they always seem iffy but can you really be sure?

Well, I have caught Tesco in the act.

Here’s how it works. I always buy butter - as I cannot stand the spreadable plastic that is margarine - and it’s always Anchor butter.

In my local Tesco, they sold Anchor butter for 88p. I am not sure why this has permeated my brain so well, when I couldn’t tell you exactly how much most other things are, but it has.

Maybe, it’s because I always buy the same thing, same size, same place, a couple of times a week, or maybe it was the whacking great big price comparison sticker next to it for a few months.
Regardless, I know it costs 88p.

It came as a surprise therefore to see a sticker go up next to the Anchor butter the other day purporting to be offering customers a good deal:

'Anchor butter, £1.22, two for £1.80'

What a load of tosh. The normal price is 88p. Either Tesco is conning its customers, or it has just whacked up the price of butter by 48%, which I find highly unlikely.

I phoned Tesco’s press office to ask them about this and offer them the chance to put their side of the story. Almost a week later they haven’t responded. It’s a fairly trivial matter – and I am sure taking over America and then the world is more important.

But this little trick doesn’t say very good things about Tesco to me.

Oh, and it doesn’t really give me much faith in Tesco’s claim that inflation in its stores was running at just 0.8% when it called for a bank rate cut this week.

Not on Anchor butter, Tesco – that either has an inflation rate of 48%, or you are conning your customers.

- Simon Lambert, This is Money

Useful links:

>> Supermarketwatch - an eye on the supermarkets
>> Tesco accused of sham 'half price' veg
>> Aldi beats supermarket giants on taste

Do estate agents really think Christmas is in October?

Unlike some I take no great pleasure in the rumblings going on in Britain's property market.

Yes, I think homes are overpriced, mortgage lenders have stoked the fires irresponsibly, and the government named inflation as its number one economic target then failed to do anything about spiralling prices in one of life's essentials - a roof over your head.

But I don't actively want a house price crash - it would devastate anyone who has bought over the past few years while leaving the asset rich older generation untouched.
I also don't feel any particular antipathy to buy-to-let and think that done properly it is a useful way to invest that gives people a degree of control they fail to get from the finance industry.
Furthermore, I think owning your own home is a good thing.

However, I do wish those with a vested interest in property would stop making the kind of foolish claims that even the lately departed England boss Steve McLaren would baulk at making while grinning through with his nice shiny teeth.

My favourite recent one comes from the National Association of Estate Agents and contains some interesting thinking.

The NAEA figures for October revealed that the number of potential buyers has dwindled rapidly and spun it thus:

'The number of house buyers on estate agents’ books was at its lowest for the past four years, with agents reporting an average of 282 buyers registered (in October) in comparison to the 326 recorded in September 2007.  Interestingly, the second lowest figure recorded was in December 2005 with an average of 302 buyers reported, indicating that the market is experiencing the type of slowdown often experienced in the festive period.'

Can you see what they did there? Slowdown, lowest number of buyers for four years, compare to second lowest number, must be a festive period slowdown.

Skips the crucial point - Christmas is in December, not October.

We are not stupid.

- Simon Lambert, This is Money

Useful links:

Analysis: Will there be a house price crash?

Mortgages and property news, tips and advice

You made your bed, now lie in it - credit crunch banks

Banks wanted it, the property industry wanted it, and some hard-pressed homeowners could have done with it, but the Bank of England opted not to cut interest rates this month.

And we should all say a very big thank you for that.

That anyone thinks the Bank of England should follow America’s lead and cut interest rates amazes me.

The reason cited for cutting rates is the ‘credit crunch’ – apparently this completely unheralded global phenomenon needs the Bank of England to save us from impending disaster.
Hmmm.

Isn’t the credit crunch a result of banks being reluctant to lend to each other, while refusing to divulge how much toxic waste they took on from the US subprime greedfest?

So, perhaps instead of urging the Bank of England to ditch inflation commitments and hack away at the Bank Rate, banks could just front up and start lending to each other.

It’s funny isn’t it how when banks are making a stinkload of money any suggestion of intervention is met with a curt response of ‘leave us professionals to run our business.’

But, the moment it turns out the professionals were mug punters and things start to go wrong, the pleas for help arrive.

I think the phrase is ‘You made your bed, now lie in it.’

Of course, the problem is the credit crunch is going to hit consumers when banks pass on their costs, but slashing rates at a point where the cost of basic necessities such as fuel, food and housing is far outstripping official CPI inflation would be foolish.

From some of the comments coming out from the financial industry you’d also think that either the worst of the credit crunch storm is blowing out, or a couple of rate cuts would help end the crisis.

Sadly, I don’t think that’s going to happen. Cheap money and uber complex financial instruments have delivered massive gains over the past five years, but those complex deals don’t look so clever now and that money looks like it was too cheap.

Perhaps rates of 5% or less are too low and lead to prices of everything from homes to businesses rising too high.

If the major world economies - especially the western ones - walk away from this with the mere collateral damage they are suffering at the moment they should count themselves lucky.

Unfortunately, I suspect US mortgage bank closures and the Northern Rock crash will be seen as a warning of the storm to come rather than the damage left in its wake.

People have used cheap money to pay too much for a lot of businesses and assets and when higher rates bite they may not be able to refinance those deals, or manage their repayments.

A sign some very astute people think prices are going to fall rather than rise came this week with Qatar ditching its £10.6bn Sainsbury’s takeover. The credit crisis was cited as the reason for this, and while the Qatari Investment Authority-backed Delta Two fund would have had to borrow heavily to fund the deal – reports suggest as much as £6bn – those pondering this should go deeper.

Qatar’s funding may be relatively small compared to other sovereign wealth funds, but if it really wanted Sainsbury’s it could have bought it. The realisation that with cash tight even an asset such as Sainsbury’s wasn’t going to have its inflated price sustained would make many much less clever men walk away. Draw your own conclusions from Qatar’s decision to step aside.

A year ago, the counter bidders would have hit immediately. Now, they are curiously absent. In a year’s time maybe Sainsbury’s would only cost you £8bn.

Doesn’t look promising for all those highly leveraged buyouts of recent years.

- Simon Lambert, This is Money

Useful links:

Will there be a house price crash?

British banks to reveal credit crunch hit

Global downturn fears over dollar slide

Underfed watchdog can't boss the fat alleycats

The Competition Commission's supermarkets probe resembles the tendency of top-level football referees in the 1980s to admonish 'robust' tackles with an affectionate pat on the perpetrator's backside. (Except that many football-followers secretly lament the passing of the latter.)

However, nobody should be surprised that the Competition Commission has taken a leaf out of the Geoffrey Howe book of savaging. It is in no position to start throwing its weight around among heavyweights of the FTSE 100.

A regulator with little goodwill among business, government or households cannot start interfering willy-nilly with private business without clear evidence of anti-competitive practice or monopoly power. And if we as consumers are left with a barren landscape of grocery retailing towered over by identikit behemoths – think Monument Valley, Arizona – then it is our own fault.

We - as a nation - voted for the laissez-faire revolution of the 1980s, we voted for successive Chancellors straining to impress on business how supine they and their regulators would be. Moreover, the same nation wanted, and wants, maximum returns on stocks and shares and pensions, and believes big business when they claim that any regulation or interference would be ruinous for UK companies and the economy.

We can't do all that and then expect an underfed 'watchdog' to fly in the face of decades of financial and economic orthodoxy, and start tackling the top cats, because our favourite local butcher has closed down. It is a grand form of 'regulatory capture' – a process recognised after the big privatisations of the 1980s and 90s, when the bodies set up to monitor the private monopolies (Oftel, Ofgas, Ofwat, etc) got too chummy with their wards. The best business deals are done on the golf course, it is said: but stand too close on the ninth tee and you can lose all your teeth.

The only thing that will decrease supermarkets' grip on the grocery and the wider retail sector is if we stop using them. And that, for many people, is totally impractical. This stranglehold is the culmination of the Big Four's business strategy – one that was entirely foreseeable ten or more years ago.

But nobody wanted to do anything about it then: we were under the stock market's spell; our funky retail giants were all part of a resurgent UK economy and even Cool Britannia. 

And now … is it too late? I like to think not, but it will take more than a limp-wristed Competition Commission inquiry to help out our small retailers, that much is obvious. Well not 'more' than perhaps, 'more ingenious' than. We need to think how to boost small retailers and local suppliers.

Unfortunately, the fundamental problem is that the grocery shops just aren't there in most town centres or suburban or rural areas to mount a challenge. There needs to be a great range of shops in a locality to negate the draw of the supermarket: if you've got to go there in the end anyway for half your shopping, you may as well simply get all your shopping there.

'It's not perfect,' most people will admit, 'But I can't spend all day driving around the county when I can get it all in an hour at Tesco, even if I don't particularly like the place.'

- Adrian Lowery, News editor, This is Money

Our man in Washington: The city with two halves

John Kennedy declared Washington to be a city of northern charm and southern efficiency.

In other words it managed to combine the worst aspects of the two halves of the American character.
With all due respect to the late president, I have long thought he was quite wrong. Washingtonians as a rule demonstrate a gentle, old-fashioned politeness quite at odds with the British view of Americans as wildly insincere people spraying injunctions to 'have a nice day' round the place in a meaningless fashion.

As for efficiency, the bartenders and waiting staff are among the best in the world, shop staff are more variable but generally good and the smaller hotels have an edge over the larger ones in terms of personnel - those working in the big places are jolly smart in their blazers and badges, and frightfully polite, but they tend to look a little terrified when you actually ask for something.
Cabbies drive large cars quite slowly and quite badly. But so does everyone else in Washington. In other words, I have long thought that the charm and the efficiency in the American capital were pretty much in the right proportions.

Until the evening of Friday October 19, since which time I have started to wonder whether the Kennedy view may not have something going for it.

To set the scene, the city was under assault from a near-tropical rainstorm that drenched everything in sight while leaving unchanged the suffocating temperature and humidity. Any Americans still doubtful about global warming ought to have been in Washington on that evening.

I was due to have dinner in the Georgetown district before returning to the city centre to join fellow journalists for a drink with Alistair Darling and his team (both he and the press were here for the annual meeting of the International Monetary Fund). The distance from the centre to Georgetown was a matter of perhaps half a mile, with a similar short taxi journey back to the venue for the Chancellor's get-together.

After about 15 minutes in which our taxi sat in gridlocked traffic, my three companions and I got out and walked. The cause of the blockage became apparent at the point at which M Street enters Georgetown - the police had closed the road.
Huge numbers of officers lined the roads, rode motor bikes on the pavement, shouted at members of the public and sat in vehicles at intersections. Apparently, anti-capitalist demonstrators had taken to the streets of Georgetown and it had all turned a little ugly, although, on the scale of protests over the years against the IMF and similar bodies, this was not a major disturbance.

Late and sticky, we fell through the door of our dinner venue, a renowned steak restaurant and one of my favourite eateries - let's call it Scott's. Here, away from the chaos outside, we could surely relax in civilised surroundings and let the superb Scott's staff spoil us rotten?

True, there was a mix-up relating to the booking, but that was our fault, not theirs, and we were happy to have a drink at the bar while waiting for a table.
True, the barmaid seemed more interested in keying details of the drinks we had ordered into a very complex looking till than in actually serving the drinks.
And true, when we inquired as to why the glasses on the bar remained resolutely empty, she replied that the drink we had ordered was 'in a different location'.

One of our party, Mr William Keegan of The Observer, quipped that what Scott's clearly needed was a side bar at which one could have a drink while waiting to have a drink at The Bar.

The wait for the table was interminable, despite constant reassurances that we would be seated very shortly. Furthermore, the police barrier made it impossible to get back to the Chancellor's get-together, thus apologies had to be sent by text through the stifling night air.

In a daze, we were finally led to our seats. And at this point, a marvellous waitress took over, cared for us, even found the name of a pub likely to be showing the next day's England-South Africa match in a city almost entirely averse to rugby, and generally restored my faith in Washington as a city of both charm and efficiency.

But here is a funny thing. As I slipped back into the embrace of the Washington I know and love, I could not help finding something vaguely comforting and familiar about the ghastly events of earlier in the evening.
The traffic jam, the noisy and over-bearing police, the hopeless bar service, the dreadful sense of nothing working properly.

Ah, yes - it was just like being at home.

- Dan Atkinson, Economics Editor, Mail on Sunday

Ken Livingstone - how to not ask what people want

Sadly, it seems even self-styled men of the people like Ken Livingstone fall someway short of actually asking the public what they want nowadays.

The public consultation on the emissions related congestion charging scheme that Mayor of London Ken Livingstone wants to use to impose a £25 daily congestion charge finishes on Friday October 19th.

However, despite Ken's alleged belief in delivering people's wishes, the actual process of asking if Londoners want this to happen is abysmal.

Visitors looking at either the Mayor of London's website, or the Transport for London website would not realise that they were about to lose the opportunity to comment on one of the biggest changes to life in the capital.

Nothing on the front page of either website tells you about this, and if you eventually dig out the public consultation, it falls a long way short of managing to ask the simple question - do you want this?

How the modern world works, part 297 - public consultation

Foolishly, you might imagine that a public consultation would involve a simple 'yes/no', what do you want question. But of course not.

No, instead you get a bizarre multiple choice questionnaire asking what you have done to help the environment over the past year, and then a pair of woolly questions about whether charging people with larger engine cars £25 a day to use them would be an incentive to use a lower C02 emitting car?

And that's it. A brief quiz about your bin and a, ‘Durr, of course ripping people off for driving a bigger car is an incentive not to drive one’ answer.

TFL and the Mayor of London will then use your answers to assess their own proposals - which they have already said they want to implement.

This is sadly what public consultation means nowadays. Don’t ask the public - they might say no. Instead, introduce a procedure that makes mock elections under tinpot regimes look a model of democracy.

It's unfortunate this, as hidden deep in Ken's plan is a germ of an idea. We do need to reduce emissions and as someone who cycles through London everyday I can see the benefit better air would bring.
But this plan will simply be one of the final steps in making Central London a rich man's playground.

The £25 per day charge - with no residents discount - for cars with engines over 3 litres, or that are in the highest emissions bracket, will hammer families who own people carriers, estate cars, or larger saloons and small businessmen.
Meanwhile, £6,000ish a year will only be a minor inconvenience to the Bentley brigade, that is slowly chasing the last ordinary families out of Central London.

Diversity is essential to a city's make-up, but those last remaining inhabitants of central London not on six figure salaries are being squeezed from their homes. If you're a wealthy Londoner paying the charge or buying a new less polluting car is no problem, for others - who often do only around 2,000 miles per year - this is deeply unfair.

There is also no exemption for classic cars, which are again rarely driven and also due to their extended lifespan much greener than buying a brand new Prius

It's a shame really. What we needed was a proper debate about how to deal with this, or even a genuine chance to answer yes or no. But as with the problems with bendy buses, Oyster cards, 'green' taxi filters that make them pollute more, and many other issues, it doesn't seem that the people get a say.

Don't worry you might think, I don't drive in London/live anywhere near it. But when something like this can be forced through without meaningful consultation in London, any other council anywhere can easily do the same.

And it's only a matter of time before they do.

- Simon Lambert, This is Money

Useful links:

How to get elected London Mayor - 30 minutes free parking

Congestion charge expands - money saving for the rich

Cut taxes for the super-rich and give us all a break

Credit card crunch the Spitting Image of 1990s

If anyone needed reminding - and sadly an awful lot of people seem to - when you need to use your credit card to survive the month you're in trouble.

And when you need to use your credit card to meet the mortgage repayments you're in serious trouble.

But according to research from housing charity Shelter that is the reality for around 1m people in Britain.

Credit cards are Satan's panacea. And in the wrong hands they are the ultimate con.

Unfortunately, the idea that you can play the credit card system, even make money from it, entered the national consciousness about five years ago. And suddenly having a wallet full of plastic became acceptable.

From the comments on This is Money a lot of the blame is being laid at the doors (No. 10 and No. 11) of Gordon Brown. But lest we forget - and for those of us with short memories - here's a clip from Spitting Image from the last time we were in this mess, when easy credit came into its own and led to a near decade of recession and repossessions.

My credit card rules are quite simple

You should never need more than one credit card.

And you should pay off the entire balance every month.

Remember: credit card companies aren't stupid. They are, however, after your money and are extremely adept at getting hold of it. They are not your friend. And are not to be played with.

If you are in trouble or think you might be in trouble get in touch with your local Citizens Advice office now.

Richard Browning - This is Money

The credit crunch chronicles

Negative equity: it's back, it's instant and we're heading for a property

The Northern Rock loan for 80 year olds with a job

Northern Rock and the Picture of Modern Britain

Listen now: 'We're heading for a property slump'

Why people deserve an inheritance tax break

‘We’ve got it - inheritance tax.’ Were those the words uttered by a crack team of Conservative policy monkeys, after finally coming up with something to draw the battle lines over?

It’s incredible how long it took them to latch on to the ill-feeling that’s been building up over what many consider a deeply unfair tax.

It's even more incredible that the Chancellor Alistair Darling thinks shuffling some figures to make it look like he has raised the inheritance tax allowance when it just stops people having to become tenants in common solves any problems or will fool anyone.

The problem is any debate on the issue inevitably manages to get stuck straight back in the old political divisions - Tory vs Labour, Haves vs Have-nots, North vs South and so on.

But strangely when discussions take place there often appears to be a reversal of which side you would typically expect to have the notion that soaring house prices benefit people.

It’s the anti-raising inheritance tax lobby that seems to believe sky-high house prices are benefiting property owners.

The suggestion is owners of family homes that have become worth far more than the inheritance tax threshold should count themselves lucky, and not mind being heavily taxed if they try and pass it on.

‘But we have paid for our homes out of taxed income, so this is double taxation’, say the pro-inheritance tax reform posse.
‘Yes, but you didn’t earn that huge increase, you just sat back and watched the value of your home soar and now want to perpetuate injustice by handing that wealth to your offspring’, counters the eat the rich crew.

And this is where the false notion of high house prices benefiting people comes in.

The owners of an average family home in South East England bought in the early 1980s for £100,000 and now worth £800,000, didn’t directly work for that rise in value, but they are in many ways entitled to it.
Living in an area where house prices are absurdly inflated is not all fun and games:

• Your house may be worth lots but so is any other house in your home area, so there’s no benefit unless you up sticks and leave friends and family far behind.
• Your children and their friends find it almost impossible to purchase a property in their own home town.
• Your home area loses its diversity, as moving there becomes possible only for very high-earners, and pubs, shops and amenities shut as developers move in on every available spot.
• Your children will face an even bigger mountain of debt, if having managed to climb on to the property ladder they have children of their own and need to buy a family home.

This is not meant to be a 'woe of the wealthy' sob story - but these are legitimate concerns that need discussing rather than being brushed under the class war carpet.
It’s true that the Conservative proposals do play straight to the stereotypical Tory South, but then the current government has ignored those voters’ concerns over house prices for a decade.

In many South East areas a small family house now costs at least £300,000. According to Halifax’s historic house price calculator that would have cost £100,000 in 1997.

If a buyer had purchased that home in 1997 they would have needed to find £10,000 for a 10% deposit, and at an average interest rate of 7% over 25 years would pay £101,000 in interest to their mortgage lender.
A buyer purchasing it today would need to find £30,000 for a 10% deposit, owe a hell of a lot more, and at an average interest rate of 7% over 25 years would pay £302,500 in interest to their mortgage lender.

Clearly there is a problem here. But despite making controlling inflation a top economic target over the past decade, the Government has completely failed to tackle rampant price rises relating to the basic necessity of a roof over your head.

Meanwhile, it has sat back and seen its income from inheritance tax post healthy gains, as a tax originally designed for the very rich drags in more and more ordinary families. (And Stamp Duty revenues have been pretty healthy too.)

The real winners of sky-high house prices are mortgage lenders and the taxman. And those hoping to score political points on this should remember the Conservatives kicked off the whole problem a long time before the current government made it worse.

So yes, perhaps in the ‘day at the coalface’ sense the owners of homes being hit by inheritance tax didn’t ‘earn it’.

But they have paid their dues and earned more right to that money than a Government which has presided over the shambles the UK housing market is in today, or any future governments that don’t come up with any meaningful plans for sorting the mess out.

- Simon Lambert, This is Money

Useful links:

Help and advice for first-time buyers

Mortgages and property news, tips and advice

Could there be a 'fourth way'?

Tony Blair's 'Third Way' turned out to be suspiciously close to Margaret Thatcher's blend of expanding freedoms to business and markets while restricting those of the individual. In this, both hues of Government fixed their agendas with a lot of help from our so-called 'special relationship' with the United States. In my blog last week I argued that the Northern Rock episode exposes the fallibility of blind belief in free markets.

On the eve of Alistair Darling's Pre-Budget Report, I'd like to state my belief that we must stop looking across the Atlantic for our economic and social inspiration. We've been doing that for 30 years and we've got Kentucky Fried Chicken, 50 Cent and a transport system that's the laughing stock of the developed world. I think we've learned all we can from that direction.

It's about time we started to try and learn more from our social democratic neighbours on the Continent. OK, I admit it, I'm an unrepentant Europhile – not in the sense of a strong European Union. Au contraire, I'm all in favour of localism: I think more policy should be determined at a level closer to where people live. And while many of its inefficiencies and extravagances are doubtless exaggerated in certain sections of the media, the EU nevertheless tends to the opposite direction: where laws are made at a great distance from citizens and uniformities are imposed across nations.

This latter prospect is one that depresses me, although it is globalisation and tourism, not the EU, that are the major protagonists behind it. I returned last week from a massively enjoyable and fascinating 16-day rail trip around the continent, taking several sleeper trains between some of its greatest cities. This diverse collection of societies and cultures within such a small area on our doorstep: we take it for granted at our peril.

In the middle of the trip I read this news piece about fears for the survival of Paris neighbourhoods expressed by the deputy mayor Lyne Cohen-Solal: 'All the cities all over Europe are starting to look the same. London, Berlin, they're going to have the same streets with the same shops,' he said. 'If we don't intervene ... we are going to have only textile shops and fast food. We don't want this kind of future for our city. Culture is a very important thing to create integration [and] a higher quality of life.'

He's spot on. Soon, Europe's monuments and treasures will be reduced to totems of expired national identities, dotted around a homogenous morass of cultural and aesthetic mediocrity. (You might surmise from this that I don't rate shopping very highly in the pursuit of happiness. And you'd be right.)

Just as unfettering markets doesn't seem to stop them working inefficiently and heading in catastrophic directions, zealous lawmaking and regulation in the social arena rarely meets its objectives (take 'the war on drugs'). I believe there are arenas in which socio-economic intervention is justified and could be effective: supporting traditional local industries, proper town-planning and regeneration programmes, and transport policy, both local and national. But these are the very areas that have been abandoned by successive governments to the selfish vagaries of private enterprise and the market.

Which brings me to the trains. My experience of rail travel and urban transport across the continent was that it was superior to and cheaper than ours – by far. Even in those nations supposedly blighted so badly by decades of communism. Polish trains might be a bit shabbier and slower than Virgin's much-touted Pendolinos – but they are affordable to everyone, not overcrowded and their vestibules don't smell of excrement.

I don't pretend to know much about the transport policy of each nation on the continent or have detailed ideas on how we can learn from them. That is the job we pay politicians and civil servants for: to study complex problems and come up with solutions that are of most benefit to the widest possible section of society.

The free market is just one of the more effective means civilisation has found to organise business so that it provides for society's needs. That's all – it's a means, not an end in itself. That's why, when it has manifestly failed to provided a decent solution (as in the case of our rail network), it should be shown no clemency and no respect.

- Adrian Lowery, News editor, This is Money

Tax the dead and not the living

Am I the only man on the planet sick to death of the sanctimonious rubbish being talked about inheritance tax?

Shadow chancellor George Osborne promises that a future Conservative government would raise the threshold to £1m because families should 'not be punished for working hard and saving hard'.

Garbage. The vast majority of estates being drawn into the IHT net are there purely and simply because property prices have risen. Hard work and 'saving hard' have nothing to do with it.

In fact, these mythical hard-working families much loved by Labour and the Tories are saving less than they ever did. Debt has ballooned to beyond £1,000 billion. As a nation we are living on money we haven't yet earned and the closest thing to hard work in many people's daily lives is figuring out how to juggle their credit card bills.

The notion millions of us will invest an inheritance in a pension fund or to cover future long-term care bills is laughable. We want to sell off gran's old home so we can live like lottery winners for as long as it lasts.

The only thing that might stop us is having to help their kids buy a place of their own. These will cost far more than at present because if Mr Osborne gets his way the hidden price control created by the stamp duty threshold will have been removed for first-time buyers.

One way or another, governments have to raise taxes to give us the services we need. As far as I'm concerned I'd rather the dead paid taxes that would otherwise be imposed on the living.

- Simon Moon, This is Money

• Tory pledge to raise IHT limit to £1m
• How to cut the taxman out of your will
• New crackdown on inheritance tax

Northern Rock shows up the market ideologues

I find it rather churlish and hypocritical to blame either Mervyn King or the Government for what has occurred at Northern Rock. The fault lies squarely with Northern Rock, and more broadly with a free and liberalised international money market: it is an instance of what economists call market failure.

As Chancellor, Gordon Brown spent ten years bending over backwards to please business leaders and the money markets with assurances of non-intervention in their affairs.

Business, banks and investors can't have it both ways: they can't on the one hand argue for markets that are as unfettered as possible in order (notionally) to maximise efficiency, profits and shareholder returns. And then on the other complain that government or central banks or regulators do not jump in to rescue them when that market (or those firms) are shown to be not up to the job.

The job, in this case, of making sure constituent firms lend and borrow sensibly and look after people’s savings.

I sauntered off on a rail tour of continental Europe for a couple of weeks on 13 September and the next day it all went off. Which I only realised a week or so later when I picked up an English paper in Vienna.

In it I read this piece by Martin Kettle, which broadly argues that the intervention by the Government to guarantee savers' deposits presents an opportunity to create a consensus for firmer social-democratic style regulation of and intervention in markets.

I agree only in part. 'Intervention' and 'regulation' must not be confused. Surely, intervention is what you do when regulation doesn't work?

So far the intervention on behalf of Northern Rock gives the message – as Merv