UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.


This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.


Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.


We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.


22 thoughts on “UK real wage growth is even worse if you factor in house price growth

  1. the truth of the matter is the house prices and stocks ( assets ) have been inflated to

    1, save the Banks

    2, fool people into thinking debt is wealth

    MSM have been stunning in their support for this

    I see a stagnation of atleast 30 years or more beckoning , or a black swan event that leads to a massive bust …..


    • Hi Forbin you’ve nailed it ….people have been misled by the propaganda machine….what chance is their of change when over 40% believe that the Government is economically competent and that other significant proportions of the population think that Brexit or Scottish independence are the solutions.

    • I think many people really believe it’s net wealth that matters. As long as asset value exceeds debt they think they are being shrewd – especially when interest rates are very low and they can afford the interest payments.
      Of course that’s wrong. Gross debt does matter because asset values can change – they can even go to zero, as many Americans discovered in the sub-prime debacle.

  2. Shaun, perhaps this is more appropriate to yesterday’s discussion but I receive a daily market update that covers issues that might affect share prices and in yesterday’s update they said “In his first major speech of the new year . . . the Bank governor said that interest rates could go up ro down in the months ahead”. How’s that for forward guidance?!

  3. Great blog as always, Shaun.
    I notice that you write “[t]here is obviously some rounding in the numbers above” since the annual real AWE growth rate for total pay for the three months to November 2016 is 1.8% while the corresponding nominal growth rate is 2.8% and the CPI inflation rate for September-November 2016 is 1.2%. Absent rounding error one would expect a growth rate for real AWE of about 1.6%. However, there is more than rounding error involved here. According to the ONS pub for the analysis of real earnings, January 2017: “This [real AWE] is calculated as nominal unadjusted AWE, divided by the Consumer Prices Index (CPI). This series is calculated for regular and total pay at the whole economy level and then seasonally adjusted.” So one wouldn’t necessarily expect the movement to be the same as one would get from deflating seasonally adjusted nominal AWE by the CPI unadjusted for seasonal variation.
    I can’t duplicate their methodology, but just deflating seasonally adjusted nominal AWE by the RPIJ instead gives a real AWE growth rate of 1.4%, and by the CPIH a growth rate of 1.5%, both less than the comparable 1.6% growth rate using the CPI as a deflator. If you look at the single month of November instead of September to November, the real AWE growth rate would be 1.3% based on RPIJ as opposed to 1.4% based on the CPIH. The CPIH measure doesn’t include house prices directly, but it should and almost certainly does reflect them. That is why it gives a lower real AWE growth rate than the CPI. Just the same, it overestimates real AWE growth compared to the RPIJ in recent months, which itself overestimates it due to its failure to include stamp duty. For the single month of July 2016, using the CPIH as deflator gives a real AWE growth rate 0.2 percentage points higher than using RPIJ.
    The decision by the National Statistician, John Pullinger, to stop publishing the RPIJ series in March, is dysfunctional and should be cancelled.

      • Yes, Forbin, it would be the best of the monthly measures calculated now as a cost-of-living index for use in upratings or for a deflator of wages. Like Shaun, I like the proposal by John Astin and Jill Leyland for a household inflation index, but the annual Index of Household Payments the ONS is working on now doesn’t look like it will be anything close to what they envisioned.

  4. Using the (England and Wales) Land Registry data for last year (up to November as there’s a lag) I can see that £200½Bn was spent on buying existing housing and only £21½Bn on buying new housing. In other words, about 90% of the £222Bn expenditure on the housing market produced nothing at all. Some of it may have produced a service but even that’s not a sure thing given the number of empty properties. And of course the value (as opposed to price) of the service that was created is a very dubious and subjective question, especially when set against its opportunity cost for those receiving it.

    The practical upshot of this is that for a £200Bn chunk of the economy, the actual rate of interest is not 0.25% or whatever, it is 5% – the average return on E&W property last year. This goes some way, I think, to explaining why low interest rates are having such limited success as a stimulus – money is being saved; it’s just not being saved in banks. Another interesting unintended consequence to the scrapping of tenancy for renters (in order to create the Rent-to-Buy market) – property is much more liquid than it used to be. A landlord today can chuck their tenants out and have their investment converted to cash within three months in many parts of the country.

    • dunno about chucking out , from the ones I know they wait until the 6 month ( yes its all short term contracts these days ) is up and then decide to improve or sell up

      money raised from this property goes to finance another purchase – sometimes with only cash .

      Rentals are not easy raised in many cases too

      but if you’ve been in the game for more than 10 years , cashing in seems ok but not widely spread

      And They have themselves complained of a shortage of property on the market – most do not want the modern houses/flats as they cannot be “milked” for more – too expensive and small I’ve heard.


      • Once the initial 6mths are up most people end up on a rolling two-months-notice contract. And the issue is not that many are cashing out, but that the cashing out option is relatively easy (compared to 30 years ago – and the relative values are much higher too), so saving your money in the form of property is a viable option to many who only need medium-term liquidity. So they do it. Of course, just like a bank, if everyone tries to get their cash out at the same time they won’t get it, but that’s true of all bubbles – they’re great until the day they’re not.

    • “And of course the value (as opposed to price) of the service that was created is a very dubious and subjective question, especially when set against its opportunity cost for those receiving it.”

      People need somewhere to live, I shouild say that is very valuable if you are homeless or even if you’re not buty are about to be because your old landlord wants you out or you have moved jobs etc.

      What other uses would you seethe money put to taht are more useful than providing shelter?

      That many are jumping on the btl wagon as a means of “easy money” does not detract from the fact they are providing a very valuable if expensive service..

      I’m not a landlord as it’s nowhere near as easy as many think when you get nightmare tenants and many are tenants for a reason……

      • If the money was going into building new houses the same service would be available at a lower price, yet its value would be unchanged. The money they saved could then be used for something more productive, useful, and indeed fun than paying off interest.

  5. There is a pattern in all this, which can probably be used to predict policy, as follows:
    1. The banks are bust if property collapses
    2. Most people who vote (young people vote less than old people) feel richer if house prices rise
    3. Stamp duty has become a major, almost cost-free tax contributor
    4. House prices don’t affect inflation
    In all, I would contend that pumping up house prices will be one of the spinning plates as long as TPTB can manage it.

      • I couldn’t agree more – it’s just my view that all people in power have stopped thinking things through and are just trying to do anything to defer the evil day!

    • If you look at the history of fiat (paper) money systems they all fail in the end due to expansion of the money supply and the debt burden.
      There are no exceptions it is happening before our eyes US national debt doubled under G.W Bush in 2001 when he entered office US debt was $5.8 T when he handed over to Obama in 2009 it had doubled to $11.6T it now stands at a fraction under $20T.
      Clearly this is unsustainable yet everyone including Trump seem to think this does not matter…what’s that ticking sound ? it’s the economic debt bomb who knows when the timer will get to zero.

  6. Hi Shaun,
    I too read the FT article proclaiming “we are all rich!” or at least the readership they think that they garner. Reading through the postings there is a healthy scepticism which is of course quite correct. I was please to notice a reference to a book on your blog recently by a poster. I bought the book and I’ve nearly read it, by Danny Dorling (a respected human geographer) and called “All things solid”. It is specifically about the UK housing market and makes for some eye brow raising conclusions.

    The so called wealth is illusory but at the same time compelling for those “in the game”, the older baby boomers who are just loving driving around and range rovers in between trips to Waitrose and sea cruises. The-buy-to let brigade have never had it so good with lower rates and higher rents. The Landed Gentry are sitting on prospective gold-mines as each village is expanded into their holdings and of course the Politicians have been flipping homes ever since their job gave them the right to have more than one and could pour expense claims into egrandisment. Finally of course the Bankocracy think lending £1M is far more profitable then lending £100K, 10x more profitable.

    So with those significant minorities with a hell of a power have been stoking up the market for 25 years. I would recommend anybody read the book by Danny since it will change your perspective.

    My conclusions now having read the book are:
    1) The UK Housing market has lost all any normal economic constraint, it could easily rise inexplicably year on year at another 6-8% into the later parts of the decade (probaboy fueled by cheap money from anywhere in the world).
    2) Having reached this almost exponential rate of price growth, therein is built its very own downfall since for every % rise an extra level of instability is introduced, it teeters ever taller over an ever deeper chasm.
    3) We do NOT have a shortage of property, there are more than enough rooms and buildings to house everyone in the UK, including uncounted immigrants. It is just very poorly distributed and ironically as the price of properties increase this is a self-reinforcing outcome. It appears there is a shortage but actually hoarding is perpetuated in the market with price rises.

    I agree with your audience, these rise add no value. The greed and avarice will end in tears. The British people will become very unhappy. The Europeans will probably laugh at us.

    Regards Paul

    • Hi Paul

      I like the return of the phrase Landed Gentry as this is all very Dune style or the past being repeated in the future aka now.

      As to point 1) That remains a possibility for London as international money can surge into it as we have seen in recent times and there are places ( China & India) where one can easily think of an incentive to do so. But elsewhere it is a much lower and sometimes zero issue so it would require ever easier policy from the Bank of England such as negative interest-rates and buying all the UK Gilt market. For the moment they have stepped back from that.

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