Effects of Rising Interest Rates in the Construction Industry

Effects of Rising Interest Rates in the Construction Industry

Effects of Rising Interest Rates in the Construction Industry

The building of houses is predicted to fall by nearly 40% in 2023, according to revised forecasts produced by Capital Economics in the wake of the government’s controversial ‘growth plan’ issued in September 2022.

This is compared to a buoyant 2022, where planning permission was granted in 2022 for more than 310,000 new homes, an increase of 10% on the year before.

This downturn in construction is likely to be especially impactful on small and local developers, who are particularly reliant on cost-effective lending to finance developments, especially where developers are involved in schemes being built for rent.

At present developers are struggling to find cost-effective lending in the storm of interest rate increases, which are directly attributable for causing UK construction growth to slow to a three-month low.

Interest rates are increasing as the UK grapples to keep inflation down. Primarily because low and stable inflation is vital for a healthy economy where people can plan for the future and where money keeps it value.

Effects of higher interest rates

1. Increases the cost of borrowing. With higher interest rates, mortgages are more expensive which discourages people from borrowing.

2. Increase in mortgage interest payments. Related to the first point is that interest payments on variable mortgages will increase. This will have a significant impact on people’s spending because a 0.5% increase in interest rates can increase the cost of a £100,000 mortgage by £42 per month. This is a significant impact on personal discretionary income.

The timing of the interest rate rises is concurrent with the rising costs of materials, which have soared since the UK officially left the EU and have been plagued with materials shortages and shipping problems. None of which has been helped by the ongoing conflict in Ukraine.

Given all the current developments, it seems a very challenging time for the construction industry and therefore it is of vital importance that small and local developers seek advice on the viability of developments before it’s too late!

How can Haines Watts help?

We advise clients within the construction industry throughout the South West region.

If you would like to have a conversation to understand the complexities of the above, or seek advice on potential impacts to your future projects, please get in touch with your usual Haines Watts contact.