After having looked at the number of employees in the prior post, it seems prudent to review the relationship between price of labour or earnings with house prices. The last post, reported that changes in labour supply lagged house price growth. However, rise employment levels provide impetus for continued momentum in house prices.
Chart 1 provides a long-term view of labour earnings, represented by Average earnings index (AEI). Chart 1 shows that earnings growth tracks closely the ebbs and flows of both the UK base rate and the retail price index. As expected AEI lags inflation. Evident is also the reduction volatility in AEI growth (inflation volatility). The bonus component of the average earnings index may contribute to the volatility of the series.
Chart 1 Average Earnings Index and Inflation
Chart 2 shows that earnings growth lags house price growth. The contemporaneous correlation of 0.06 indicates a week relationship between house price and wage inflation. Uncertainty about job security and future earnings prospects may hold back demand for house prices.
Chart 2 Earnings Lag House Prices
Volatility in earnings growth has declined similar to UK Base rate and retail price index. Analogous to employment levels, earnings are supportive to momentum in house price growth.