Retreat of buy-to-let investors laid bare in stamp duty data

Buy-to-let and second home purchases dropped by 18 per cent in the last three months of 2022, underlining the impact of soaring mortgage rates and the turmoil unleashed by the “mini” Budget.

Buyers of “additional homes” — buy-to-let and second properties — must pay a three percentage point surcharge in stamp duty in England and Northern Ireland. Provisional data from HM Revenue & Customs on Friday showed the number of affected transactions fell by 18 per cent in the fourth quarter compared with the same period in 2021, and was down 31 per cent on the third quarter of 2022.

The share of stamp duty receipts from buy-to-let and second homes sank to 35 per cent from 42 per cent year on year — the lowest level since the third quarter of 2016, shortly after the surcharge was introduced.

Buy-to-let investors were at the sharp end of turmoil in the mortgage market following the “mini” Budget of September 2022, which put buyers to flight after triggering a steep rise in mortgage interest rates.

Property investors typically use interest-only mortgages, which magnify the effects of fluctuations in rates. Lucian Cook, residential research director at estate agent Savills, said their greater exposure to higher rates and a fall in the availability of mortgage credit was one reason why their share of the market fell over the period, as well as greater pressure from tax and regulatory changes.

“This means it’s much harder for them to justify expanding their portfolio or buying into the residential sector,” he said.

The Truss experiment scared everybody witless, but I think most people have got their heads around it

Second home buyers tend to account for a much smaller proportion of the market and are typically wealthier, he added, but these buyers were also sensitive to changes in market sentiment. “Under cost of living pressures, making what is essentially a luxury purchase such as a second home will become more difficult for them to justify,” Cook said.

Average buy-to-let mortgage rates have risen from 2.9 per cent for a two-year fix in February 2022 to 5.9 per cent today, though they have eased from a peak of 6.75 per cent in November, according to finance site Moneyfacts.

Some point to signs of a recovery in activity this year. Henry Pryor, an independent buying agent, said he had seen demand return among buyers of second homes or investment properties, suggesting the sharp slowdown in the fourth quarter “was a blip not a trend”.

“The Truss experiment scared everybody witless, but I think most people have got their heads around it and they’re making adjustments where necessary in terms of what they’re offering for properties. This is how a market functions,” he said.

However, the lag factor in stamp duty — which is only registered on completion of a purchase — means the next quarter may continue to show a fall in activity.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “This data covers transactions likely agreed in the late summer and early autumn, so they won’t demonstrate the full impact of the ‘mini’ Budget . . . It depicts a very different market to the one we are facing now just a few short months later.”