How Does the Increase in Prime Interest Affect the Construction Industry?
Those working in the construction industry need to manage the effects that a rising prime interest rate will have on their business. In fact, the entire housing market and Canadian economy at large will see ripple effects from the impacts on the construction industry.
So, how exactly does the hike in interest rates affect construction? Below, we discuss the effects on various levels within the industry and what you can do to mitigate rising costs.
It is always a challenge to pick out construction projects that have a strong return on investment. It may be harder as interest rates increase. While you can presumably make solid returns on your investment with higher interest rates, projects are less stable. Early-stage financial issues can shutter whole projects, and the buildings you invest in can end up with challenges that seriously delay the project or impact its later profitability.
Developers are typically highly leveraged, and all projects are funded by borrowing capital. Now, developers will need to deal with rising expenses at every level, from increases in interest on financing to increases in materials and labour costs. In times like these, it’s best to seek suppliers who can offer you fixed prices but also try to work on cash flow issues in order to make increases more manageable during projects.
You can also add ceiling rates to new contracts to get a cushion against additional prime interest rate hikes in 2023. Then there are supply issues which are sure to be maintained as the economy struggles. Those who have strong relationships with their suppliers may be able to forecast some shortages and plan accordingly.
When possible, developers should attempt to keep investors and their banks up-to-date about changes in their balance sheets. That’s the best way to maintain a positive relationship even through challenging business environments.
The impact of interest rate changes may be felt most acutely by subcontractors first. They are the furthest removed from the capital in the building process and the most likely to rely on financing for day-to-day operations, including payroll. As a result, subcontractors whose finances are not in order may struggle just to meet operating costs, which puts pressure on developers and delays projects.
The Housing Market
Canada already has an inflated housing market due to constrained supply. Property values have risen dramatically in recent years, creating environments where families who want to buy a home cannot keep up. As the construction industry slows down, this will worsen overall supply issues in the housing market.
This will affect the housing and rental markets, as both single-home construction and multi-family dwellings will experience a slowdown in construction.
Work With A Professional
Interest rates will continue to impact construction, slowing projects and affecting stakeholders and the wider economy. That’s why it’s important you work with trusted construction partners that know how to navigate challenging financial environments.
At RJC, we incorporate creative and efficient problem-solving in all aspects of our business, helping our clients get the most out of their project investments. If you’d like to learn more about our wide range of services, please contact us today.