Interest rate hikes make construction projects more expensive because the cost of construction materials increases. It also reduces the profit as the construction companies may be forced to pay out of their pockets for increased interest rates on loans. The rise in interest rate reduces housing demand as the mortgage becomes expensive.
The increase in interest rates may halt new projects, thus lowering growth. So, contractors who plan for future construction projects are recommended to seek suppliers who work with fixed labor and construction materials.
How Does Hike in Interest Rate Affect Construction Industry?
Increased Cost of Construction Materials
The increase in interest rates is commonly accompanied by an increase in the rate of inflation. As a result, construction companies will face an increase in the cost of construction materials.
Suppliers may also be forced to raise prices because of the increased cost of financing on their end. This reduces the profit and size of new construction projects, lowering economic growth.
Lower Demand in Housing Market
The construction companies are influenced by a decline in housing demand. The increase in the mortgage cost mainly causes this decline.
In December 2016, new home sales were reported to fall to a seasonally adjusted annual rate of 536000, as per the commerce department, which was 10.4% lower than the projected rate of 598000. This was attributed directly to the increase in the cost of mortgages.
Cash flow ensures that the construction company has adequate working capital to operate without risk. Many construction companies tend to operate with limited cash flow leaving with little flexibility when interest rates hike. The extra money required to repay loans may not be available, which could lead to many challenges.
Construction companies may need to fund themselves and delay the payment of their receivables. Some contractors may stop investing in future projects, leading to a downturn in the construction business.
Construction companies can easily borrow money to invest in construction projects and make satisfactory profits after repaying the loans. However, when the interest rate is raised, the ability of construction companies to get loans and make profits decreases substantially, especially when the money is borrowed on fluctuating interests.
Interest rate hikes make construction projects more expensive because the cost of construction materials increases.
Construction companies will face an increase in the cost of construction materials. The suppliers may also be forced to raise prices because of the increased cost of financing on their end. This reduces the size and profit of new construction projects, lowering economic growth.
The interest rate hike makes mortgages more costly, reducing the housing demand.