As we come to the end of 2023, I thought it would be worth looking back over previous Insights to see how our comments and predictions fared.
House Prices and the Property Market
You can read our July Comment here regarding mortgage rates and the Welsh economy: Mortgage Rates and House Prices – A ticking time bomb for the Welsh economy? | Bevan Buckland LLP
We predicted transaction volumes would fall (they’re down approximately 40% in SW Wales) but that prices would gradually adjust rather than fall dramatically. We believed there was unlikely any significant increase in repossessions (there hasn’t been). More specifically, we talked about changes in demand for different housing types impacting pricing most, with demand remaining strong for affordable family homes in good locations and retirement/downsizing also supporting prices for some properties. Still, that demand for larger rural and semi-rural homes could fall. The latest data appears to bear all this out, with the number of transactions above £300k falling even more markedly and prices for detached homes falling faster than for semi-detached and terraced properties. Demand has remained strongest for family-friendly semis in good locations in the £200-300k price range.
With the mortgage market stabilised, better deals and availability returning, banks are keen to lend. A lack of new homes coming onto the market also supports prices – the Land Registry shows only 78 newly built properties being sold this year in the whole SA postcode (this number surprised me).
New rules, including requirements for sprinkler systems, could be impacting the economics of house building.
Prices seem to have stabilised after dropping back to their pre-COVID levels. Affordability in the region, at five times median earnings, is favourable compared to other parts of the UK (8 times average and much higher in the South of England). Those parts of the UK that have seen the most significant drops are those areas that saw the biggest post-pandemic rises – typically those areas where there was a rush to relocate alongside a move to home working. Good houses in good regions remain desirable, and there are still willing buyers, just not as many. Although mortgage arrears have crept up a little, it’s not significant, and there are few signs of forced sellers in the market. It is forced sellers that would really move the market down.
Inflation and Interest Rates
We were bearish on interest rates and inflation early on, highlighting in 2022 that “The Bank of England is going to raise rates and probably do it faster and go higher than currently expected. They need to strangle demand and reduce the money supply enough to get inflation back to 2%; the only way they can do this is by pushing the economy into recession.” Rates rose faster and went higher than was being predicted at the time.
In January, we forecast that “Inflation will fall back in 2023 from its highs, as some numbers roll out of the year-on-year comparison, but I think there is a significant risk that inflation will creep back up in late 2023 and into 2024.” The second part of that prediction hasn’t happened yet, but it’s still too early to say inflation will continue its downward trend into the first quarter of next year. The energy price cap is going back up, and the rise in the minimum wage will have an impact.
The weather was kind to inflation last year, with a mild winter and good harvests that may not continue. Signs of a mild recession in the UK are growing, with GDP having dropped back into negative territory recently, but employment and wage growth remain strong. Expectations of interest rates coming back down quickly looked unlikely, and barring a more significant economic contraction, this is still the case.
The Welsh Economy
In June, we noted that “many organisations have upgraded their economic outlook for the UK, predicting the country will avoid recession with overall household spending remaining stronger than often predicted, but persistent inflation coupled with rising housing and mortgage costs remains the key risk, and based on the latest data Wales may already be in a technical recession as service sectors drive growth in other parts of the UK”. Good data on the Welsh economy is hard to come by, there is a significant lag in regional data for the UK. We highlighted weak manufacturing as being a drag on the Welsh economy, and we are seeing increasing anecdotal evidence of that weakening continuing.
We also highlighted that “Construction is a bellwether industry, so construction growth is a positive and ongoing investment in civil infrastructure, commercial development and housing is going to be key to the Welsh economy picking back up. Major initiatives like the South Wales Metro and green energy investments will have to do much of the economic heavy lifting, along with regeneration projects such as Swansea BID”. The outlook for further investment in Construction is weakening as financial constraints bite, so a lot will still depend on whether some of the bigger initiatives, such as the Celtic Freeport, can pick up some slack.
In March, we discussed the wildly divergent views regarding predicting where the economy would head CEO Insights: Mixed Economic Messaging | Bevan Buckland LLP and highlighted that businesses needed to adopt a risk-based approach to their decision-making. The risks and uncertainty have not disappeared; businesses and organisations should maintain a firm grip on their balance sheets and reserves and, in particular, understand any risks around credit tightening and monitor increasing insolvency risks amongst customers and suppliers.
The Political Outlook
Regular readers might have noticed my general antipathy towards our political institutions over the past year, particularly my frustration at a lack of an industrial regeneration strategy to take advantage of deglobalisation trends. Sadly, nothing much has changed. A lack of any transition plan since Mark Drakeford’s announcement that he would be stepping down and a zombie Government in Westminster haven’t helped with long-term planning and policy-making. The long-term failures in our education system, I think, are also increasingly contributing to weak economic performance.
Mark Drakeford’s resignation now clears one of the hurdles. Once the question of who succeeds him has been settled – Jeremy Miles seems to have the support within Welsh Labour in South West Wales – two things will ultimately drive policy in Wales, assuming Labour remain on track to win the next Westminster elections: Will Welsh Labour and National Labour work more closely together to deliver a long term strategy for Wales; and is there a chance that a non-Labour coalition could break Labour’s grip on the Welsh Government? Labour will not likely achieve a workable majority in the next Welsh Government elections. However, it’s also difficult to see any coalition emerging that includes the Conservatives if the Conservatives continue their move to the right. The next Welsh Government elections aren’t until 2026, so Labour will have a year or so to showcase which direction they choose to go.
On a positive note, as it is the season of goodwill, I will give credit where credit is due. Regardless of any political allegiances, in Swansea at least, Rob Stewart, as leader of Swansea council, has done as good a job as anyone in tackling the political malaise and driving local regeneration, so credit to him and his team.
We all know what the issues are, but in Wales, we really need greater alignment between Cardiff and Westminster to make any real progress.
What else have we noticed in 2023?
We have seen a significant increase in businesses looking at succession planning, with Employee Ownership Trusts and Management buyouts becoming an increasingly attractive exit route.
We have worked on a number of transactions in 2023. With a large proportion of the population around retirement age, owner-managed businesses are increasingly looking at how they secure the future of their businesses.
We have noticed that almost all business owners leave this process too late before they start.
If you don’t have a clear long-term plan, then now is probably the time to talk to us about it.