Wages are rising and inflation is falling: what does that mean for house prices and mortgages?

Rising wages and falling inflation may seem like good news, but it can have a drastic effect on homeowners.

The combination of these two economic factors ensures that high mortgage rates will only fall slightly, while house prices will simply stagnate.

In the three months to June, wages rose 7.8 percent year-on-year excluding bonuses – the highest record since 2001.

Meanwhile, inflation fell to 6.8 percent in July – down from 7.9 percent in June and well below the peak of 11.1 percent recorded last October.

When it comes to mortgages, we usually focus on what the Bank of England is doing with base rates and the implications that has for mortgage borrowers.

However, in recent months it has become all too clear that borrowers should take a keen interest in inflation and wage growth numbers.

Both could determine what the Bank of England will do with the base rate in the future, which in turn determines the mortgage rate.

For the past 20 months, the Bank of England has been trying to bring inflation back to its target of 2 percent by raising its key interest rate from 0.1 percent to 5.25 percent.

The theory is that raising the cost of borrowing for individuals and businesses will reduce demand for it, slowing the flow of new money into the economy.

Meanwhile, the Bank of England fears that rising wages will add to inflation, with companies raising prices to protect their profit margins.

We decided to take a closer look at what the latest inflation and wage figures could mean for mortgage holders and house prices.

What falling inflation means for mortgages

Higher-than-expected inflation figures at the end of May increased the likelihood of further key rate hikes.

In response to heightened expectations for key interest rates, both government bond yields (the interest rate on loans from the UK government) and swap rates – the money market rates that lenders use to price fixed-rate mortgages – rose significantly.

However, markets then reacted positively to the news that both CPI and core inflation in the UK fell in June.

Since then, a number of major mortgage lenders have announced that they are lowering their rates. Lenders, including Santander, NatWest, HSBC and Nationwide, have all slashed mortgage prices.

The fall in UK inflation to 6.8 percent in the year to July is in line with market expectations.

The fact remains, however, that inflation is high and far above the Bank of England’s target of 2 percent per annum.

Nick Mendes, mortgage technical manager at mortgage broker John Charcol, believes this week’s inflation numbers are good news for borrowers in the long run.

This is because it reduces the likelihood of more base rate hikes – and more expensive mortgages.

He says: “After the inflation announcement, markets are expected to remain stable without any sudden knee-jerk reactions as we have seen before.

In the event that inflation continued or increased, the markets would have priced in higher and longer base rate hikes, which would have affected the pricing of the fixed rate lenders.

“Inflation news continues to bring calm and stability, which we have needed for a long time and means we can expect lenders to continue to slowly price downwards.”

What do higher wages mean for mortgage rates?

Wages rose at a record annual rate in the three months to June, according to official figures.

This is likely to amplify the Bank of England’s concerns about inflationary pressures and may induce it to keep key rates high for longer.

Ruth Gregory, deputy chief economist at Capital Economics, said: “With the labor market still tight and wage growth picking up, we suspect services inflation will remain uncomfortably high for some time to come.

“We think the Bank will raise interest rates further, by another 25 basis points, from 5.25 percent to 5.5 percent in September.”

This means that although mortgage interest rates will fall slightly in the coming weeks and months, they will remain relatively high for some time to come.

Adds John Charcol’s Mendes: ‘It will be a few months before we see substantial reductions in fixed rate prices, we should expect small reductions in the coming weeks before we see lenders start competing with each other again.

He says: “In terms of five-year fixed-rate deals, before the end of the month we could see major lenders charging a low 5 percent deal and a lender may be below the 5 percent mark in early September. breaks through.

“Unfortunately, I expect the majority of two-year fixed rates to remain above 5 percent.”

What about house prices?

You would expect rising wages to be good news for mortgage borrowers. Usually, the more someone earns, the more they can borrow.

Mortgage lenders typically let people borrow up to 4.5 times their annual salary, although this varies depending on the individual and the bank involved.

Higher wages would likely put upward pressure on house prices. However, according to Mendes, higher interest rates will continue to nip house price growth firmly in the bud for the time being.

He says: “While many would assume a pay rise is positive news in terms of mortgages, we don’t expect the latest data to mark the turning point in the reversal of property prices.

Borrowing and household expenses still remain relatively high and any wages will help ease the burden of the increases over the past 12-18 months.

Mendes says that while this may allow borrowers to borrow a little more, he sees homeowners and potential homebuyers taking a more pragmatic approach compared to previous years.

He adds: “When the cost of borrowing was below 2 percent, a customer would typically view maximum loan as the goal to achieve.

‘In the current climate, despite the fact that a customer knows the maximum he can borrow, customers are much more pragmatic in their approach and they ensure that the mortgage remains sustainable. They want to make sure they have enough disposable income in case rates get higher if they move away from their flat rate in the future.

“Basically, while other factors such as mortgage costs, lender affordability, real estate prices continue to fall before we see a reversal in the current downward trend in real estate prices.”