Market Activity - Number of Monthly Transactions
The number of houses bought and sold each month in England and Wales is roughly about 100,000, but varies considerably throughout the year with most being transacted during the summer and less during the winter.
In the UK property market, unlike the Stock Market, it turns out that house price inflation (HPI) is closely correlated with the rate of transactions, so that we can use the monthly numbers of transactions as a good indicator of the current inflation. This is useful because the YoY and QoQ measures of HPI are backward-looking differences and tell us what was happening six months or six weeks ago rather than what's happening now.
But getting a good timely measure of the transactions is not so easy, and one has to rely on measuring something slightly different but which is otherwise closely related, for example,
The Land Registry monthly count of the sales registration forms is authoritative but samples sales at the completion stage and consequently lags the initial price agreement by about +15 weeks. There is a significant publishing delay and the figures are subject to undercounting for the most recent months because of delays in processing the paperwork. Typically, the counts for two most recent months need to be discarded and the two months prior will show significant undercounting.
HM Revenue & Customs
The HM Customs & Revenue are able to count the Stamp Duty certificates collected at the completion stage as a measure of transactions. However, the certificates are counted for the month in which they are issued, rathen than the month the sale completed, and frequent changes in the way in which the figures are compiled makes it difficult to compare trends across extended periods.
HMRC have recently introduced a new UK series that looks promising - it splits out residential and non-residential transactions, assigns the counts to the month the sale completed (but implies that the most recent months will be estimates and subject to revision) and is run back to April 2005 to allow comparison with the (now frozen) original series.
Figure 1. Number of monthly transactions based on HM Customs and Revenue data.
Bank of England Mortgage Approvals
A much more timely proxy for the transaction numbers is available in the BoE number of mortgage approvals for house purchase, LPMVTVU not-seasonally adjusted, and LPMVTVX seasonally adjusted. These are counts of mortgages approved based on results of a house survey and are revised net of cancellations and exclude remortgages. One might expect that they under-report the number of sales because a proportion of houses are bought with cash, however they report slightly above the number of Land Registry transactions based on sale registrations. They have the big advantage of being timely, and can be calibrated against the HMRC and LR data to take account of slow changes in structure of the market, for example, the proportion of houses bought with cash in relation to those with a mortgage.
Figure 2. Number of monthly mortgage approvals for house purchase based on Bank of England data.
Correlation between HPI and mortgage approvals
There is a very good correlation between the BoE mortgage approvals for house purchase SA numbers and reported YoY house price inflation (HPI) about six months later - an approvals level of about 80k to 90k per month corresponds to neutral HPI. This follows because in the property market price inflation is strongly correlated with transaction volume.
Figure 3. Correlation between house price inflation and the number of mortgage approvals.
The graph shows %YoY house price inflation against the BoE monthly approvals for house purchase numbers (in 1000s, SA, LPMVTVX) throughout the last price cycle. However, more recent figures for house price inflation are running slightly below those implied from the historic correlation.
Currently, about 25% of property transactions are cash purchases and the ratio of purchases made with cash to those made with a mortgage has fallen slightly. However, it does appear that the since early-2006 the number of approvals/transactions needed to produce a particular level of house price inflation has increased to about 95k/month.
From mid-2008 the number of approvals as a proportion of overall transactions has fallen as mortgage credit became restricted. This has caused a reduction in the number of approvals needed to maintain neutral house price growth. The neutral level is currently 60-70k per month, see the house price predictor.
House Price Predictor
The estimations of house price inflation based on the approval numbers can be significantly improved if the constant representing neutral HPI is allowed to vary slowly with time. In this case it represents the enthusiasm of estate agents when setting prices, i.e. it's the number of approvals (a proxy for sales) required to deliver a given amount of HPI, and it can be determined dynamically from a rolling average of prices and approvals. The double observation of prices and HPI can be combined using a Kalman filter to provide an excellent estimator of the current state of the housing market, see our house price predictor.