Jobs market holds clues about direction for house prices and mortgage rates
What happens to core inflation will determine how much higher the Bank of England will push rates.
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Expect to start hearing a lot more about ‘core inflation’ soon.
This particular measure of how fast prices are rising, which excludes more volatile food and fuel costs, is updated next week, and will be scrutinised by the Bank of England as it decides whether to raise the base rate from 4.5%.
Core inflation rose to 6.8% in April even as the headline rate fell to 8.7%, showing how the underlying pressure on prices is still upwards.
The Bank raised rates for the 12th consecutive month in May as it attempts to tackle above-target inflation, which was sparked by a post-lockdown surge in demand, supply chain disruptions and the spike in food and energy costs arising from the invasion of Ukraine. UK core inflation has remained stubbornly high due to wage price growth in a tight labour market as well as rising rents.
If you are buying, selling, or re-mortgaging it will certainly be worth looking closely at next week’s number and employment data more widely. Especially in the sort of nervous lending market that saw HSBC withdraw some of its mortgage products in recent days.
Last week, for example, brought news that demand for staff had fallen to a five-month low and starting salaries rose at the weakest pace in two years. That reduces upwards pressure on core inflation.
If you are currently trying to decide between a fixed-rate and a tracker mortgage, this sort of data could help inform your decision. The higher core inflation remains, the more a fixed-rate deal may appeal.
Last month’s high reading has already changed the thinking of some borrowers, according to Simon Gammon, Managing Partner at Knight Frank Finance.
“Given the renewed uncertainty over how far and fast the Bank will need to raise rates, we have seen more people moving back to fixed-rate deals in recent weeks because the spread between them and standard variable rates has become material,” he said.
Such a hedging of bets is completely understandable, and the fog will only begin to lift as more data emerges.
Wage growth and core inflation are likely to peak in the second half of this year, according to Savvas Savouri, chief economist at asset manager Toscafund. That said, he thinks any rate rise from the Bank of England is largely symbolic because it comes too late.
“If the Bank raises the rate, it will be the equivalent of a referee playing more injury time than needed when it is 5-0 due to five of his own mistakes,” he said.
“The bank rate should’ve gone up in 2013 and during lockdown,” he said. “If it goes to 5.25%, it won’t be there for long because there are so many disinflationary forces like anniversary effects – we are now more than twelve months into the Ukraine surge – and the fact supermarkets are about to start cutting prices,” he said.
House prices have also come under more pressure in recent weeks.
The Halifax became the latest national house price index to fall into negative territory last week and the last RICS survey spoke of gathering storm clouds on the horizon. It’s certainly true that the outlook has darkened in recent weeks.
However, the wage growth driving core inflation higher is also one of the mitigating factors that will protect house prices from a steep lurch down.
Low unemployment, record levels of housing equity, amassed lockdown savings (including at the bank of mum and dad) and the availability of longer mortgages will all help keep the downwards pressure in check. We expect a 5% fall across the UK in 2023.
House prices are coming back down to earth after a strong three years, not falling off a cliff.