Latest labour market data spells more trouble for UK mortgage holders

Data from the labour market spells more trouble for the mortgage market - pain which may well spill into the wider economy.

The data showed the fastest cash increase in wages (outside of the pandemic) since records began.

However, whilst many commentators pointed towards a "wage-price spiral" in the UK, Paul Johnson, Director of the Institute of Fiscal Studies, argued that real wages are not rising.

He tweeted: "Staggering statistics. Real average weekly earnings are [the] same today as in November 2005.

"A completely unprecedented period with no earnings growth. Hard to compare but likely this has not happened over any comparable period since Napoleonic wars."

Nevertheless, the nominal increase reported in wages sent the yield on two-year UK government bonds up to 4.73 per cent - in anticipation of the Bank of England raising interest rates further. The base rate is expected to rise again this month to 4.75 per cent, before hitting 5.5 per cent by the end of the year, up from 4.5 per cent currently.

The 4.73 per cent gilt yield is higher than the peak seen in the chaos after last year's mini-budget under the Truss government when unfunded tax cuts spooked the market.

The impact of that self-inflicted pain under Truss is still being felt – in the form of the sharp and sustained increase in fixed-rate mortgage costs.

Speaking on the impact on the property market, widely respected Economist, Mohamed El-Erian, who is also the President of Queens College Cambridge, tweeted:

Around 37.5 per cent of the UK population are homeowners with an outstanding mortgage. Whilst some criticise the use of mortgage rates as an indicator of the general economy, others point out that there is a wider ripple effect attached to mortgage rates.

Spikes in mortgages this year will continue to dent the spending power of impacted households, further slowing the wider economy.

In addition, rising rates mean that those landlords with buy-to-let mortgages will pass on the pain to renters.

On 13 June, Pat McFadden, who is the Labour MP for Wolverhampton South East and also the Shadow Chancellor, commented in Parliament on mortgage rises: "Two-year fixed rates are at 5.86 per cent, up by over half a per cent in just a month, products being withdrawn."

This latest shock comes after various mortgage providers had already started restricting access to products. HSBC, the country's largest bank, was the first last week to temporarily withdraw all mortgage deals for new customers, whether residential or buy-to-let.

At the beginning of the year, the 1.3 million households with fixed-term deals set to expire in 2023 were already facing the prospect of increased mortgage rates. This week's data will only exacerbate the challenge for families already feeling the bite of the cost of living crisis.