How Do Rising Interest Rates in 2023 Affect Construction?

Over the last year the Federal Reserve has increased interest rates while desperately trying to fight inflation. Interest rates have a huge impact on our economy and are heavily responsible for recent bank closures. Mortgage rates have been as high as 7% and currently float around 5.5% in mid-May 2023. Here are some of the ways that high interest rates affect the construction industry. 

Cost of Capital

Construction is a cash heavy industry. It costs builders more to borrow, and that makes end user prices much higher. Higher prices make building riskier and banks don’t like risk! Also, contractors rely on equipment and heavy machinery that are very expensive and typically financed. Contractors will have to carefully choose how they grow their business. 

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Reduced Demand

We saw first hand what happened when interest rates were low - an absolute buying frenzy. Now with high interest rates, we’ve seen a significant slow down. High interest rates reduce demand because the cost of mortgage loans are much higher. This effect is amplified by adjacent construction issues such as rising material costs and labor shortage. When rates go up, properties that were once affordable are no longer so. Rising rates can also cause property values to go down, and when property values are down, builders margins are lower. 

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Construction Costs

Costs of both materials and labor have skyrocketed since the beginning of the pandemic. As we have discussed, to fight inflation the Fed has increased interest rates. One of the side effects of doing that is that materials prices have gone up significantly, even as they attempt to combat exactly that. 

High Interest Rates Are Bad For Everyone

The reason the Fed raises interest rates is to fight inflation. If people can stop spending money they can get inflation to cool down. Builders suffer, buyers suffer and everything costs more for everyone, for now. What was once an affordable dream home, could have to wait now. Buyers and investors are much more cautious and diligent with what they’re willing to purchase. However, according to Forbes, Jerome Powell, the Federal Reserve Chair has recently acknowledged that we are already much closer to avoiding a recession than previously anticipated.

References 

Fintecbuzz. (2023, May 17). 3 Ways Rising Interest Rates Are Impacting the Construction Industry. Retrieved May 19, 2023, from https://fintecbuzz.com/3-ways-rising-interest-rates-are-impacting-the-construction-industry/

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Forbes Advisor. (2023, January 24). Mortgage Interest Rates Forecast. Retrieved May 19, 2023, from https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/

Gobridgit. (n.d.). Interest Rates Affect Construction. Retrieved May 19, 2023, from https://gobridgit.com/blog/interest-rates-affect-construction/

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Axios. (2023, January 24). Labor Market Interest Rates. Retrieved May 19, 2023, from https://www.axios.com/2023/01/24/labor-market-interest-rates

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PRNewswire. (2023, January 24). How Do Interest Rates Affect Mortgages and Home Building? Retrieved May 19, 2023, from https://www.prnewswire.com/news-releases/how-do-interest-rates-affect-mortgages-and-home-building-301740848.html

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