Good to see UK wages rising faster than house prices

After yesterday’s employment and wages data we advance on the latest UK inflation and house price data today. If that seems the wrong way around then yes it did used to be the other way around. But it was decided that getting the wages numbers at 9:30 on a Wednesday did not give our parliamentarians time to use them at Prime Ministers Questions later in the day.

Moving on from that let me set the scene by pointing out that with a few exceptions inflation seems to be in retreat. When we consider the world of low and negative interest-rates in which we live then this is another fail for economics 101. Inflation should have been higher as we observe another gap between theory and reality. Mostly the issue comes from putting the world consumer in front of inflation as those are the numbers used whereas the monetary easing went into asset prices. I noted someone pointing out that Germany had very little house price inflation before 2010 yesterday and had a wry smile. But with the US S&P 500 index above 3000 it is also true that money went into equity prices although of course some of that is genuine growth. Also bond markets have been pumped up to extraordinary levels making final salary pensions and annuities eye-wateringly expensive.

So as we note that it is a narrow measure of inflation we are pointed towards we also note that it looks like it has been trending lower.

The US looks to be below target, the Euro area has got further away from it in spite of all the actions and the line for Japan shows complete failure in the main Abenomics objective. Oh and they should have put the Europe line in the middle as they mean 0.9% not -0.9%.

The UK Pound £

There is some currency driven inflation in play for the UK however as we are in the midst of a weak run. The recent decline started on the 3rd of May when the effective or trade-weighted index was at 79.8 as opposed to the latest 75.6. The main player here is the US Dollar due to the vast majority of commodities being price in it. The fall here over the same time period is from US $1.317 to US $1.24 as I type this. So slightly worse.

If we switch to the oil price we see that things have changed since last month. Here are our official statisticians from back then.

Brent futures were down to $61.33 a barrel and U.S. West Texas Intermediate (WTI) crude futures were down to

Since then the decreases they were looking at have been increases with Brent Crude at US $64.60 and even more so with WTI at US $57.70. That will not feed into the  consumer inflation numbers today but will do so over time. So whilst there is not much inflation in the offing the UK is likely to see more mostly via a weak currency.

Today’s data

This was something to put a smile on the face of Bank of England Governor Mark Carney as he whiles away the time waiting for a phone call from the IMF.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in June 2019, unchanged from May 2019.

So dead on target although the superficial theme of a type of summer lull ignores a fair bit of action under the surface.

The largest downward contributions to change in the 12-month rate between May and June 2019 came from motor fuels, accommodation services and electricity, gas and other fuels, with prices in each category falling between May and June 2019 compared with price rises between the same two months a year ago………The largest offsetting upward contributions to change came from clothing and food.

Just for clarity utility prices were unchanged as opposed to last year when gas and electricity prices were raised. The clothing picture is also more complex than presented as prices there still hint at trouble on the high street.

Clothing and footwear was the only broad group producing a downward contribution in June 2019, reflecting a fall in prices of 0.4% on the year.

Prices fell by less than earlier in the year.


The immediate prospects are downwards.

The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to June 2019, down from 1.9% in May 2019.

So goods inflation should trend lower and that may hold sway for a bit.

The growth rate of prices for materials and fuels used in the manufacturing process fell 0.3% on the year to June 2019, down from 1.4% in May 2019…….The annual rate of input inflation was negative for the first time since June 2016, driven by a large downward contribution from crude oil.

Thus we see the broad sweep of lower inflation that we looked at earlier via lower inflation expectations. The cautionary note is that due to the lower UK Pound we will see more inflation than elsewhere and in this instance also a higher oil price will affect us. We have a rough rule of thumb for how this is playing out if we look at the Euro area.

The euro area annual inflation rate was 1.3% in June 2019, up from 1.2% in May.

So 0.7% it is then…..

House Prices

Here is something that on national emoji day should be represented with a thumbs up and a smile.

Average house prices in the UK increased by 1.2% in the year to May 2019, down from 1.5% in April 2019 . Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 4.4% over the year to May 2019, down from a fall of 1.7% in April 2019 and the lowest annual rate in London since August 2009 when it was negative 7.0%.

We see that real wages are increasing by around 2% per annum compared to house prices which is very different to the general picture in the credit crunch era as Rupert Seggins reminds us.

The longer term picture. Average London house prices up 53% on January 2008 vs a UK average of 24%.

Also the house price falls in London which seem to be creating quite a scare on social media amongst the journalist fraternity are welcome. Prices in London are too high for the vast majority.

There is an irony in that for once, by fluke the woeful use of imputed rents does not affect the situation too much.

The OOH component annual rate is 1.2%, unchanged from last month.

Although we have another conceptual problem with it. That is the issue of rents usually rising with wages as the rise in both nominal and real wages are not impacting. This may be because the rent numbers are heavily lagged, I suspect that any impact takes around nine months and the full impact 18 but that is my opinion as we are not told.


We have had a couple of days of good data from the UK economy giving us a summer tinge. A fall in inflation would have been better but actually RPI fans did get one.

The all items RPI annual rate is 2.9%, down from 3.0% last month.

The gap between it and the other measures may trim a little over the next few months as the house price measure it uses ( depreciation) is lagged too. One clear improvement that could be made to it would be to put house prices in directly and I would look to increase the weight of it in the basket. Why? Well if we take the broad sweep using rent has owner occupied housing with a weight of around 17% in the basket whereas house prices in the two versions of it are weighted at 7-8%. So your average brick or window has twice the impact using rents which have lower inflation than house prices which generally have higher inflation.




21 thoughts on “Good to see UK wages rising faster than house prices

  1. So -4.4 per cent London house decline. British buy to let 5 per cent down. Anybody see problem here?!? I think this was my rabid, frothing blog warning of this a year ++ ago.

    • today’s MSM is about 3-6months behind the trend here is sunny Surrey.

      even Rightmove eventually had to admit that even asking prices are having to be cut . £25K asked of me , still no sale ……..

      considering all I think the BoE and MSM are missing the plot ……

      and if they do wake up at the BoE what will Carney do ? cut rates by 0.5% which will be too little , too late…..

      the ripple effect will soon hit the rest of the country- ah, what wailing and gnashing of teeth will be heard !

      no one could have foreseen this !! ( well everyone except those in charge 😉 )


      • Forbin,
        Keep your powder dry, unless you absolutely have to sell I would wait it out, Carney, the UK government and history would be on your side, don’t forget my previous post about the 5 year fixed mortgage rate, it is likely to drop sharply, giving another boost to first time buyers and those re-financing their current fixed rate deals.

      • Can’t you give one or other house to your kids, whom I believe you have said are marooned with you because of house prices?

      • Reducing interest rates to negative will only hold up property prices so long forbin then you are correct there will be gnashing of teeth.

    • Hi Forbin

      The other week I noted someone reporting on a really high oil price forecast. It was US $300 I think. You know what that means! The next large move should be downwards so we might get a bit nearer to $20. Might be a bit of upwards pressure through the summer first.

  2. Shaun,

    Well isn’t this fantastic news 2% inflation bang on BOE target and wages rising faster than inflation.
    In fact on first look retailers must be jumping for joy share prices going through the roof, but they are not!

    So why not?

    Well real wages rising at 2% and RPI has actually fallen from 2.9% but is now 2.8% ! that is part of the answer!

    I agree entirely with you inflation is supposed to be rising but it isn’t, and it all depends which data one relies upon.

    What I also noticed was PPI yoy June was negative -0.3% as against a forecast of =0.5% and ppi input month on month came out at -1.4% as against -1% forecast!

    So although inflation expectations are for inflation to increase further down the line input prices are falling well below forecasts.

    The minute the data was releases the £ strengthened then fell then strengthened again against the dollar and euro the markets are still digesting the news.

    With inflation falling in most the developed economies it appears to me on balance that there will be still more chance of an interest rate cut than rise and this is the opinion from Investment Week

    • More red flags on global economy from Lagarde:

      “The IMF in April cut its outlook for global growth to the lowest since the financial crisis amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade. The IMF forecast the world economy will grow 3.3% this year, less than the 3.5% it had estimated in January. It was third downgrade to the outlook in six months.
      Reports from major economies show trade tensions weighing on global manufacturing. U.K. factory output is shrinking for the first time in almost three years while gauges for China and South Korea remain below the key 50 level. The JPMorgan (NYSE:JPM) Global Manufacturing PMI fell to 49.4 in June, the weakest reading in data since mid-2016.”

      The figures out today from the ONS on inflation didn’t convince me for a second the UK will see any respite soon and I don’t go along with any arguments wage growth will get us out of the midden.

      However as for property prices if things get worse the fall in property prices in London could get worse and then later on spread elsewhere.

      In the meantime M&G prevents exit form one of its property funds is another red flag:

      • Hi Peter

        There is clear problem with those type of property funds which is that the investment is illiquid ( months) but you can withdraw daily. I am not sure what the right format would be but if you invest in one I am afraid that halts/delays are a fact of that type of investment. Even worse than in being illiquid is the fact that people often want to get out together which is exactly what the cannot do.

        As to the world economy much of the bad news seems to be coming from the Far East. The trading nations there are having a rough run, will they be the canary in the coal mine.

  3. What happens to a 5 per cent buy to let owner (seems to have been a big part of the market) when you are under value equity wise (according to the mortgage evaluator) when it comes time to renew your mortgage? What effect will forced sales have on the market?!? I am not familiar on how this is handled in Britain.

    • hello canuck, don’t think most main street lenders will take over the mortgage so long as you can pay the installments – not over here anyways.

      if you can’t make the installments then they extend the term ( 25 to 35 years ) or put you on interest only or both ( if you’re already on interest only …. um )

      It’s the BTL who held on since the tax changes that might suffer ….. perhaps another reader will fill in for me there


    • I’m not certain on this one but please correct me if I’m wrong. The drop in value would lead to a higher LTV and so put the re-mortgager in a higher interest rate bracket for the loan, if it results in a % higher than 100 I don’t think they could re-mortgage, and as Forbin has pointed out below, if the payments are too high, they just extend the term.
      It’s all a bit theoretical anyway as there hasn’t been any appreciable falls in the overall market(with the exception of London and the South East) for over ten years, and as long as they keep interest rates where they are(or lower) there won’t be any falls.
      Central banks have now by their policies of zero interest rates and QE reversed the stockmarket and the housing market into a “tail wagging the dog” situation whereby the growth of which leads economic growth whereas historically, economic growth and hence wage growth led to higher share prices and house prices.And consequently, they cannot let either go down.

  4. If the property value falls and the term ends the lender doesn’t have to re-mortgage!


    I mean the lender could extend the term but they don’t have to and if I was a lender in these conditions with property over valued I wouldn’t.

    • Peter,
      I think the original question was regarding those on fixed rate i.e short term deals that expire and have to re-finance..

      • But isn’t the answer the same?

        Or am I missing something?

        The lender simply doesn’t have to re-finance?

        This is no different with the last property price crash the lender could repossess the property if there is a shortfall.

        • Hello Peter,

          yes than can default the debtor and repossess the property , but maybe they would not . Publicity does count in this sector of business and , if I recall rightly , there was reluctance to do so before as the Banks and building societies ( those left) did not want be owning the asset as it depreciated and made their losses worse.

          they got a lot of pressure to extend loans , so that’s what they did .

          of course in the end that might not be enough , so expect the “special measures” or other financial instruments to be use by the BoE / HMG and “to do what it takes ! ” .


          • forbin,

            I think all depends how things pan out history is no prediction and or guarantee in future events and bear in mind I feel the property bubble is far worse than its ever been and debt worldwide far bigger than its ever been.

            There lies the problem and there is only so much one can do to prevent the house of cards collapsing.

            As for a property price crash well I am glad I don’t own one of those Persimmon homes with all that shoddy brickwork and numerous other defects, Persimmon was savaged by a MP at Prime Ministers questions today and well deserved imo the MP did not mince his words and kicked them in the crotch.

            Persimmon making on average £60k a property all helped by the help to buy its a complete disgrace considering the shoddy workmanship. Where I live the town was mainly built in the Victorian era most houses built to a high standard and will probably still be around longer than those modern houses.

            I never liked timber frame nothing beats a double skin brick wall no matter what they say. Some of the Victorian house walls built on sand have walls which are as level now as when they were built and don’t need piling to prevent subsidence.

            Pure greed by the house builders and the government let the public down for allowing the builders to get away with what they are doing.

            Hunt said he would build more houses but we want proper houses not dolls houses with a postage stamp of a garden and walls that thin the kids can hear their parents hanky panky in bed and the semi next door shaking while all this is happening.

            Neither do we want houses built on flood plains and then finding out your property been built on a lake at various times of the year and needing the garage to store a boat!

            Have lost confidence in the government to regulate this country gone to the dogs the last 50 years and I feel sorry for the younger generation.

  5. Shaun posted several days ago about a Battersea condo Indian investor who bought a 1.4 mil unit with 200k down and had to sell for 1.2 mil because he was refused a mtg because the assessed value had dropped. I assumed everyone else who bought a unit would face a similar problem?!? Hmmm. Or?!? Special case?!! More leniency on values for british owner/occuppier?! It just peeked my interest in what was occurring in London.

    • Hi Canuckistinian

      It was more than several days ago but yes I remember it. I also remember that it is down valuations that drive house prices lower as the two feed on each other. Others though might have been cash buyers or had more equity,

  6. Great blog as usual, Shaun.
    As you say there is no point to the lagging of housing prices in the RPI and the RPIJ using exponential smoothing, which only serves to dampen the impact of the house price decline the UK is now experiencing. The 1994 RPIAC report that led to the introduction of a depreciation component with the February 1995 RPI update made no mention of it. It only came in with the July 1996 RPI update. If the ONS were not operating a zombie RPI, it would probably have come under fire from people on the advisory committees. There is no such smoothing of prices in the otherwise very similar replacement cost of depreciation component in the Canadian CPI, nor has there ever been a call for it.
    That being said, the RPIJ is still showing more inflation than the CPI or the CPIH, its annual inflation rate falling from 2.4% in May to 2.3% in June. The RPI for dwelling insurance and ground rent, not to be found in either the CPI or the CPIH, had its inflation rate rise from 6.3% in May to 6.9% in June, and this would have contributed to the higher RPIJ inflation rate.
    I would willingly let the RPIJ go if there were a Household Inflation Index to replace it. But the National Statistician’s statement in June that the ONS would calculate an HCIC, distinct from the HCI, to include “a measure of capital mortgage repayments” doesn’t inspire much confidence. It sounds like a badly watered down version of the original HII proposal. The current unreformed RPIJ, with all its defects, like the exponential smoothing, would be a better inflation measure for upratings purposes.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.