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Analysis

Published: 9 May 2016 | Author: Mohammad Jamei

In our last market commentary and gross lending estimate for March – which produced a figure 40% higher than in February – we estimated the scale of the distortion caused by the government’s change in the stamp duty rates for second properties that came into effect on 1 April.

Now, data from the Bank of England and HM Revenue and Customs, coupled with updated CML data for March, allows us to comment further about the reported jump in activity, as well as provide more information about the split between different groups of buyers. It is still the case that we won’t have the full picture for some time yet. As new information becomes available and there are further revisions to current data, the picture will continue to become clearer.

As well as the distortion caused by the new stamp duty rate, which appears to have been larger than anything we’ve seen before that’s associated with a tax change, March was also affected by an early Easter. We usually see more activity just before Easter, as movers prefer to complete transactions before the holiday break.

The stamp duty effect

On a non-seasonally adjusted basis, property transactions reached 162,000 in March. Based on data for recent months, we might have expected this figure to have been just over 100,000, which implies a large chunk of the increase in transactions was down to the stamp duty change.

A 60,000 increase in property transactions compared to the baseline was larger than expected, and we can now see that this was mainly as a result of a marked increase in cash transactions. Cash-funded transactions increased by nearly as much as mortgage transactions, even though cash has on average only accounted for 35% of the market.

Our current best estimate is that an extra 32,000 mortgaged transactions took place in March, which means there was also a big jump in cash transactions, to the tune of 28,000.

Chart 1 provides a breakdown of this increase in activity, by each category, comparing our expectation to what was actually observed. The difference between the two is also shown.

Chart 1: Property transaction expectation and out-turn data

Chart showing property transaction expectation and out-turn data

Source: HMRC, CML Economics, CML calculations

Download the data

Of the four categories, the largest proportionate increase was in buy-to-let house purchases, which increased by more than 180% from February. The next biggest increase was in cash transactions, which rose by more than 80%. Transactions by movers increased 60% and first-time buyer purchases increased by 28% compared to February.

So, although growth in buy-to-let was large, it still made up only a third of the 60,000 increase in total property transactions.

Alongside the growth in transactions, there was a corresponding jump in lending. Our initial estimate was of extra lending of between £4 and £5 billion, with the data from the Bank of England showing the actual figure was at the higher end of this figure.

We’ve now revised our initial estimate of lending in March to £26.2 billion, which was 46% higher than February. This implies just over £5 billion extra lending than would otherwise have been the case, which roughly tallies with the 32,000 or so extra mortgaged transactions, given an average loan of about £150,000 per mortgaged transaction.

What next?

What will happen over the next few months is difficult to gauge, but we can take an educated guess, based on the data we already have.

House purchase approval figures have historically been a good forward indicator of property transactions, though more recently the two have diverged somewhat. Chart 2 shows how approvals increased in the lead-up to the stamp duty changes we saw in December 2009 and April 2012. In comparison, house purchase approvals were largely unchanged in the lead-up to the latest stamp duty change.

Chart 2: House purchase approvals and transactions

 

Chart showing house purchase approvals and transactionsSource: Bank of England, HMRC

Download the data

Our understanding is that approved applications that were in the pipeline were squeezed to complete before the stamp duty deadline, as opposed to seeing a big increase in new applications being approved in March. As a result, it is very likely that we will see lower activity levels in the next few months, which ties in with early data we have collected for April, showing a marked drop-off in lending.

We estimate that there will be an average of 10,000 fewer mortgage transactions in April, May and June, which would largely offset the increase in mortgaged transactions that came through in March.

And just as the dust begins to settle on this stamp duty change, we’re likely to see further distortion caused by June’s EU referendum, which is already weighing on sentiment and affecting commercial property transactions and the wider economy. It is likely to feed into the residential property market, too. It may be that we have a housing market of two halves in 2016 - but we'll just have to wait and see.