This is Money Blog

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?

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

 

I'd like low house prices and higher interest rates

If it came to the crunch which one would you choose: higher interest rates and lower house prices, or vice versa?

I know which way I’d cast my vote: I’ll take lower and more stable house prices with a higher cost of borrowing, please Bob.

Unfortunately, the portents don’t look good for this. Property optimists are getting excited as monthly reports show property price rises, the Royal Institution of Chartered Surveyors reveals high levels of interest, and the economy shows slight signs of perking up.

The pessimists are frantically running around tearing the green shoots up, but there is an undeniable bit of some spring in the property market’s step. Of course, this should not add up to recovery: unemployment is rising, the economy is fragile, lending is still tight, redundancy is a dinner party topic, etc.

Common sense says ‘no to house price rises’. But then common sense has had a terrible run when it comes to the property market.

On top of this, despite the current economic mess, we are failing to reassess our attitude to how the whole property prices game works. The seeds of another boom are being sown now, in the middle of the bust.

Currently there are a lot of people looking at properties 20% cheaper than late 2007, combined with interest rates below 4%, and thinking ‘bargain’.

Except, of course, even at this substantial discount on the peak, most properties are not a bargain. They might look cheap, but that’s because we've become desensitized to ludicrous property prices - and it is low interest rates that have done this.

It is only because the base rate has been at 6% for the past decade, and typically a fair bit below this, that house price inflation spiralled, yet bizarrely there was little attempt to tackle this inflation in a nation of homeowners.

The average house price managed to rise 263%, from £75,751 in June 1999, to peak at £199,612 in August 2007 (Halifax). It has since fallen back by 21% to £158,565, but this remains six times the average wage.

So have there been any beneficiaries of that astronomical rise in house prices? Well some families feel richer because they have a home that’s worth lots, but that’s an illusion.

If you’re mortgaged then high house prices simply mean more debt not more wealth. If you own outright you can only release that gain by selling up and either buying a smaller and inferior house, or leaving your home area, otherwise your rent or any other property you buy will negate your profit.

High house prices deliver a mirage of wealth, make it expensive to move, leave families hugely in debt, mean children can’t buy without parents’ help, and the inevitable popping of a property bubble has catastrophic economic effects.

With a charge sheet like that you wonder why anyone wants high house prices. And then you remember who the winners are: the banks.

If the average home costs £75,000 and you raise a 25% deposit, you have to borrow £56,250 over 25 years; if it costs £200,000 you have to borrow £150,000 (and in the boom years you don't do that you borrow £180,000-plus.) The benefit to the bank from high house prices, in the interest you pay it and the total charge over the 25 years, is substantial.

So while rates had to be slashed to deal with the very real prospect of economic collapse, the cuts have saved many from repossession and I would wish negative equity on no-one, I hope that when house price inflation rears its ugly head again the powers that be tackle it properly through interest rates.

If we are nearing the bottom of the property market, it would be nice if we used this as an opportunity to start again and try to control house prices, because frankly we've given the banks more than enough cash recently.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

You shouldn't drive to Tottenham: the statistics prove it

More than 80% of Britons use credit cards to clean car windows, but three quarters have never cut up a pizza with their flexible friend.

Clearly the above is not true. But it’s not beyond the realms of possibility that there is some junior PR person out there working on a study to be sent out claiming the above.

The modern media gets bombarded with a lot of surveys and studies – some serious and some seriously spurious. And often the claims are either so blindingly obvious or completely irrelevant that you wonder why they bother.

That is until you read a story, quoting the bizarre statistic and company, and remember some suit reckons told the PR they may sell more credit cards by getting mentioned in an article stating people don’t cut up pizza with them.

But not all studies are like this. Some have a curious personal relevance and are actually quite good. So today I bring you the Premier League of car insurance claims, thanks to our friends at Churchill.

This gives a league table of how likely car insurance claims are in certain football stadium postcodes.

Not immediately useful you may think, but then there are a lot of people who park and drive near football grounds and it could be a handy guide for when to leave the car at home.

The fairly sensible advice I can distil from it seems to be it’s all right to drive to Bolton or Wigan, but avoid Tottenham or West Ham.

And I can support that. The number one Premier League hotspot for car insurance claims is Tottenham, and, as anyone who lives in North London knows, for some inexplicable reason people’s driving in Tottenham is uniquely awful.

On top of this, last year my car was written off by a drunk driver, while it was parked outside my house. He smashed into the back of it, abandoned his vehicle and ran off, leaving his car in the middle of the road (with the hazard lights on). Guess what the police accidentally told me? His address and yes, he came from Tottenham.

To add to this, I live within chant hearing distance of the fifth most likely ground for claims, so can now understand why this combination of statistics meant, despite its seeming randomness at the time, it was highly likely someone from Tottenham would write off my car while it was parked in my road.

I can also see why Man Utd come fourth, as most people driving there on a match day are in massive 4x4s, or Porsches, or worse still Porsche Cayennes, and don’t have the faintest idea where they’re going. (I’ve been there and seen them, it’s true). And football fans will guess Liverpool and Everton come so far down because of all those friendly kids who offer to mind your car, or damage it, depending on the payment of a small fee. (I've been there and seen them too, it's also true.)

My team Watford is not in the Premier League, so we don’t make it into the table. But I imagine our statistics would just be painfully mediocre and simply include those fans deliberately driving into walls after losing all hope when desperately trying to navigate their way out of a multi-storey car park.

So, should you be in any way interested, here you go: The Premier League car insurance table

- Simon Lambert, assistant editor, This is Money

	Football Club	Likelihood of claiming compared to average
1.	Tottenham Hotspur	59%
2.	West Ham United	46%
3.	Aston Villa	45%
4.	Manchester United	34%
5.	Arsenal	27%
6.	Manchester City	23%
7.	Middlesbrough	22%
8.	Fulham	20%
9.	Chelsea	20%
10.	Portsmouth	20%
11.	Hull City	14%
12.	Newcastle United	10%
13.	Liverpool	9%
14.	Everton	9%
15.	West Bromwich Albion	1%
16.	Blackburn Rovers	1%
17.	Stoke City	8%
18.	Sunderland	11
19.	Bolton Wanderers	11%
20.	Wigan Athletic	15

Deflation: we could do with some real falling prices

The latest inflation figures have prompted yet more warnings of deflation from economists.

The Retail Prices Index' fall to -1.2% has delivered inevitable deflation headlines. Except of course, this isn't strictly deflation.

Deflation would be if the official measure of inflation the consumer prices index (CPI) went negative and that is still above the 2% target, at 2.3%.

But would a good bout of deflation really be that bad?

The criticisms are that it increases borrowing in real terms, leads to wage freezes and slows the economy. But, on the flip side, it's lower mortgage borrowing costs driving deflation, while people's wages are already being frozen, the Government has promised a pensions rise, and aren't lower prices generally used to attract customers?

A look at the inflation data shows why deflation would help the man in the street, despite the economic arguments otherwise.

What is driving RPI deflation is falling housing costs - but this is down to the base rate being slashed to 0.5%, compared to 5% a year ago. Further major factors are cheaper clothing and footwear, as stores desperately discount to sell off goods, and lower motoring costs, but that is compared to exceptionally high petrol costs a year ago.

The vast majority of things are still getting more expensive and that is from a point last year when they were already rising in price.

RPI deflation is being skewed by mortgages and petrol at the moment: and these will drop away within a year, leaving the figures looking very different.

Arguably we could do with the items on the right of the graphs below heading left. Who doesn't want cheaper food, fuel and light (energy bills), household goods, fares and other travel costs? At least it would make up for the pay freezes, inevitable tax rises, and rising unemployment we're already dealing with.

And you never know, we might actually spend more if people stopped ripping us off.

- Simon Lambert, assistant editor, This is Money

Here's the RPI figures:

And here's the CPI figures, the official measure of inflation which is still above the 2% target:

 

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

Student loan interest rate decision is a disgrace

The Government's decision not to pay interest on student loans is disgraceful. Albeit, in the long line of current scandals it's not a massive one, but this is far more invidious than claiming you forgot you paid off the mortgage for expenses purposes.

We have always been told that the current student loan system is designed so that loans do not grow or shrink in real terms and that is why the interest rate is set at inflation.

The thing is though, what students don’t have properly explained to them before they are coerced into taking on £10,000-plus of debt is that the UK runs a bizarre inflation system.

This has official inflation regarded as the Consumer Prices Index measure but uses the old measure of the Retail Prices Index to set various things, including the student loan interest rate.

So the first problem with student loans is that Government is pushing students towards university and then encouraging them to start their adult financial life with £10,000-plus worth of borrowing that they don’t understand.

Quite why the student loan interest rate is based on the broadest inflation measure, which includes mortgages and housing costs and was therefore jettisoned as the official inflation figure, has never been properly explained.

Except of course, that this has worked in the Government’s favour for years, as RPI has been consistently higher than CPI.
 
Therefore the student loan interest rate, set at the March RPI figure and imposed for a year from September, has always cheated those students who foolishly believed a loan that tracked inflation would actually be set by the Government’s official inflation figure.

This problem came to a head in 2007, when March’s RPI figure spiked to 4.8% and the student loan interest rate was set at that level for an entire year.

This doubled the previous year’s rate and to give a personal example, I was now paying an interest rate just 0.19% below my fixed mortgage rate, on a supposedly low cost loan.

Protests followed this rate hike but the Government stood firm and confirmed student loan rates would always be based on the March RPI figure. That was of course, until suddenly RPI no longer worked in its favour.

The need to slash interest rates down to 0.5% to combat a deep recession has now pulled RPI down so dramatically that RPI for March 2009 was -0.4%. Deflation had arrived and so under the principal of keeping student loans stable in real terms and always using the March RPI figure, they should have started paying interest of 0.4% from September.

But, of course, they won’t. The Government it seems can’t and won't change the rules when students are being hammered with an almost 5% rate caused by inflation, but it certainly can when it comes to paying interest and ensuring the loan doesn’t increase in real terms due to deflation.

Oh, and just to make it a little bit more galling, that will be the Government full of MPs that had free university education and student grants.

Sure, it’s not a lot of money. At -0.4% deflation on a £10,000 loan, it’s only £40 a year, although the Budget has predicted -3% RPI by September and that would be £300 a year. But it’s the principle of the matter. If you make a rule that you refuse to bend on, then you should stick by that: and not just when it works in your favour.

And in a nation afflicted by its debt and driven deep into recession by it, you do not make daft statements justifying your decisions by saying the interest rate doesn’t affect monthly payments, implying that means it doesn’t really matter.

Such as this by the Student Loans Company: ‘The rate of interest makes no difference to borrowers’ monthly repayments. Borrowers repay 9% of their earnings over the income threshold of £15,000.  Whatever the rate of interest is, that monthly repayment will not change.

‘The repayment threshold will also remain at £15,000 for the next 12 months. Had the Government used a negative RPI rate to calculate this, the threshold would have reduced and borrowers would have started repaying earlier and ended up paying more. Setting interest at 0% has prevented this from happening.’

That mirrors a similar statement made by then minister for education and skills Bill Rammell, when the loan rate doubled to 4.8%: ‘It is crucial to note that, for the vast majority of borrowers with income-contingent loans, there will be no difference at all in their monthly repayments, which will continue to be deducted from their salaries at the rate of 9% of any income over £15,000 per annum. The interest rate affects only their outstanding loan balances.’

That is like saying that it doesn’t matter if your credit card company hikes the rate on a long-outstanding balance, because your minimum monthly payments won’t change, or it cuts your minimum payment. Of course it does, the size of your debt will increase and that’s the most important thing.

But then why would we need all the students that we are supposedly training to become the leaders of the future to understand how a £10,000 debt that they start financial life with works?

If we are going to encourage people into university on the premise that they will earn more than others rather than as a social good, as we currently do, then perhaps I agree they should pay: although I’m not sure on this.

What I definitely don’t agree with though is getting people into years of debt under a badly explained Government–sponsored system that changes the rules to suit itself.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

Will the recession be W-shaped?

Welcome to the W-shaped recession. After some hefty debate last year over whether the recession would be U, V, or even L-shaped, a new contender is ready to gain more attention.

The beauty of it is that it currently manages to match both the optimists' green shoots and the pessimists' gloomy warnings.
 
Before the banking crisis, economists were debating a number of scenarios:

The V-shaped recession: short and shallow - a swift plunge followed by a bounce back

A U-shaped recession: longer a deeper - a dive down to the doldrums and then recovery

An L-Shaped recession: Not good (note the lack of a recovery) - a plunge then a long period of stagnation

Each of these letters still has their backers, with some switching between letters and others hedging their bets.

The W shaped recession has been lurking around the edges for a while, but was thrown into the mix again by George Buckley, chief UK economist at Deutsche Bank, who suggested the economy may grow again by June.

He warned though: 'The big risk is you could see a W-shaped recession. We could see policymakers taking back some of the easing too quickly.'

The W shape would essentially mean that green shoots being spotted are just that, but these would then be wiped out (perhaps by a late frost) and growth will fall again before recovering.

And if you think about it, the W has its merits. The juddering halt the global economy was brought to came courtesy of the exceptional event that was the banking crisis. Meanwhile, the internet age has enabled companies around the world to hit the big red button to startling effect, bringing a rapid decline in output and big job losses.

The kitchen sink approach to easing the banking crisis has seen a huge amount of money thrown at the money markets around the world, which is filtering through to the economy, and output is increasing again to meet demand after destocking and a collapse in industrial production.

Added into the mix is that those who have kept their jobs have not seen much economic pain and having done a few months of saving, they are now going out and spending again, albeit cautiously, and possibly even thinking about buying a house at 20% off two years ago.

All of this is giving momentum to a blip that will provide the little peak in the middle of the W, before things take a turn for the worst again, as unemployment, pay freezes and banks feeling the pain of bad mortgage and commercial loans kicks in.

It makes sense, so are people convinced? Well the W is still very much a small time contender, with bulls pushing for a V, the more cautious a U and the doommongers a very long L.

Oh and just to make things slightly more complicated, here's another thrown into the mix courtesy of Merrill Lynch: the slightly tilted square root recession.

In a European investment research note, Holger Schmieding, head of developed Europe economics, says: 'The 'square root' scenario is becoming quite popular, with a sharp initial recovery followed by a levelling off halfway down the road.'

So that's a v with a long tail, showing dive in GDP, recovery and then semi-stagnation, or a modest loss of momentum as Merrill Lynch prefers.

There you go, letter based recessions. Hours of fun (for some), but you can bet the overall picture is bound to be an O, with boom and bust rolling around in a vicious circle.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

When will interest rates rise again? Ask a child

It’s a fairly safe bet that interest rates will be kept on hold at 0.5% by the Bank of England tomorrow – but when will the base rate rise again?

This is the million dollar question for those trying to make the most of their savings, or decide on a fixed or tracker rate mortgage.

The problem with forecasting what will happen is that no-one really has the faintest idea. Sure, there are plenty of economic forecasts out there, but commentators can’t even reach a consensus on whether deflation or inflation is the real risk.

The world’s governments have thrown so much money and effort at the problem, in a scattergun fashion, and its difficult to know whether it’s actually working or whether we’re about to end straight back in the hole we are trying to dig our way out of.

So what should you do? Voraciously read economic research, work out your own cunning interest rate predictor, flip a coin?

My suggestion would be ask a child. Try and explain the current situation to them simply and carefully and see what they say. You won’t get an answer. They’ll point out the whole situation is bonkers and eventually get bored. (If they don’t they will probably grow up to be an economist, so I’d be wary of any answers).

That solution will then remind you that in the current economic madness you might as well just make a choice and stick by it and not berate yourself when you get it wrong.

Alternatively, you could look at what a whole bunch of people who don’t really know what is going to happen are staking their cash on.

Spread betting firm Spreadex says its punters think we could be looking at very low rates until at least December 2010. It allows investors to bet on future Libor quotes and there is so little movement in future prices that some are heading as far as the end of next year for their bets – and still only predicting between 2.7% and 2.8%, compared to 1.4% now.

Libor measures the rates at which banks lend to each other, and while it doesn’t necessarily move in line with the base rate this indicates betting types in the City, don’t reckon rates are rising by much anytime soon.

Personally, I reckon we might start to see rises from the current 0.5% base rate at the end of the year and be back up to 2% to 3% by the end of next year, which if Libor returns to its normal relationship with the base rate means Spreadex’s punters almost agree with me.

But then I’m neither an economist or a child, so I wouldn’t recommend listening to me either.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

Are properties really starting to sell?

I’ve noticed a bit of a phenomenon occurring away from the world of house price statistics. The re-emergence of the word sold.

Homes being advertised for sale appear to be having a spate of sold notices whacked on them.

Sold is the new buzzword, whether on internet listing websites, estate agents’ own sites, or the old fashioned agent’s board.

Obviously, we’re not talking about a deluge here, we are in a property slump. But there is a noticeable number of properties that have been sat on the market for ages now claiming to be sold (at least subject to contract).

So have they really been sold or is this an estate agent’s ruse to drum up interest?

I have heard recent rumours of agents in some popular areas sticking up the sold signs as soon as an offer comes in – in an attempt to flush out other interested parties.

But then I’m also hearing that there has been a shift in sellers’ moods and having seen some properties hit the spring market with lower asking prices, they are now willing to accept lower offers from cash-rich good quality prospective buyers.

The test will be whether those sold signs last into summer – I’ll be keeping my eyes on them.

- Simon Lambert, assistant editor, This is Money

- Property prices: What next - news and analysis