Market Insight - May 2017
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Firing the Starting Pistol

There may be trouble ahead....

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The UK's labour market has been a real success story since the financial crash. Employment levels have risen and unemployment has fallen, despite more and more people becoming available for work. That’s all great news, so what’s the trouble?

The answer is that while more people are in work, they aren’t earning a lot. Average wage growth in 2006 was 4.7% but in 2016 it was just 2.6%. And on top of that inflation is beginning to eat into the amount that households have left to spend on themselves, or indeed on buying or saving up for a new home. For five years from 2009 to 2013, inflation adjusted earnings fell, before turning modestly positive in the last three years.

But the cost of essentials have risen faster than the general rate of inflation. Consumer price inflation reached 1.2% in Q4 2016, but inflation on transport was 2.9% and utilities 1.9%. Average annual wage growth was 2.6% in Q4 2016, higher than it has been, but not large enough to leave households better off in the face of the rising costs of essentials.

Combining the squeeze in incomes, the rise in the cost of living and higher house prices leaves households in a sticky place. But the big fall in mortgage rates is a relief meaning that average ability to buy has been fairly stable since 2009 – except in London where ability to buy now is worse than it was in 2007.

The upside is that mortgage lenders are keen to lend, mortgage rates are becoming more competitive and the pace of house price growth is waning. These add up to a less bad, if not rosy, scenario for ability to buy. So, we can face the music and dance.

Shifting affordability - ability to buy






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