Since the interest rate’s all-time low of 0.1%, last seen in 2021, the UK Bank of England’s Base Rate has increased incrementally to 5.25%, a level not seen since the global financial crisis of 2008.
The construction industry, known for its sensitivity to interest rate movements, often experiences a slowdown in construction work volumes when interest rates are high. However, in July, the Monetary Policy Committee (MPC) voted to cut rates to 5% from 5.25%, the first cut in rates since April 2020. Despite only a 0.25pt rate reduction, this move is predicted to have a positive impact on the construction industry output and consumer confidence.
Understanding the impact of these rate changes is crucial for construction industry professionals, investors, economists, and policymakers – it can help them make informed decisions and navigate the sector’s ever-changing landscape.
Borrowing costs and industry output
Fluctuations in interest rates can significantly impact the cost of financing for construction projects. When interest rates are low, businesses can obtain loans at a lower cost, allowing them to invest in new projects and expand their operations. Lower rates reduce the cost of capital, making long-term investments in construction projects more attractive and can lead to higher activity in project starts.
Conversely, high interest rates can deter businesses from taking on new projects. They can influence the decision-making process for developers and investors, potentially leading to a slowdown in construction activity during periods of high interest rates.
End user affordability
When it comes to an end user, interest rates directly impact housing affordability, which is a critical factor in the construction industry. Higher interest rates can make homeownership less affordable, potentially reducing the demand for new residential construction. On the other hand, lower interest rates can make homeownership more accessible, stimulating housing construction activity.
Supply chain issues on existing projects
While interest rate increases are one of the ways to curb rising inflation, they can also exacerbate supply chain issues, driving up prices for building materials. Construction costs have risen, leading to higher pricing for materials like timber, steel, and concrete. Data from the Department for Business & Trade shows a 36% increase in building materials since May 2020. To address increased costs due to higher interest rates, construction firms will have to adjust project pricing and reallocate resources. This may result in firms taking on less work and potentially exacerbate existing labour shortages.
A positive outlook for H2 2024 and beyond According to the Office of National Statistics (ONS), construction output was down for three consecutive months from February to April 2024. Still, a more positive interest rate outlook in
the form of cuts for later in 2024 and early 2025 could spark a positive sentiment in consumer confidence and improve affordability. A recent article on the ThisisMoney website predicts a further 0.25pt cut by November 2024 and further cuts in 2025.
Despite a tough start, the current forecast predicts renewed growth in project starts for the second half of 2024. According to a recent report from Glenigan, housing market activity is expected to increase from the latter part of this year as interest rates gradually decrease. Project starts are also anticipated to increase by 14% in 2025 and by 6% in 2026 as interest rates decline and consumer confidence improves.
The impact on facade installers
Rates and increasing costs can have a real impact on all construction firms across the industry. Facades installers are not exempt from these challenges. A Scottish façade specialist recently filed for administration following a slowdown in the commencement of new construction projects as a result of the substantial increase in interest rates instigated by the Bank of England in 2023, as highlighted by one of its directors.
Despite the uncertainty of interest rates, Eden Facades has continued to experience strong growth since they began to rise. Tony Hill, Managing Director at Eden Facades, comments:
“Fortunately, we have been largely unaffected by the rate changes. In what has been an unusual few years, with the industry having to overcome many obstacles, such as Brexit, COVID-19, and more recently, high interest rates, we as a business have continued to focus on what we do best, which is to continually deliver a great service and produce work of the highest quality.
“The strong partnerships we have built over the years with some of the biggest contractors, such as United Living, Kier, and Berkeley Group, to name a few, have helped us to secure more work, which is a testament to the great work we do.
“We cannot control the external factors that affect the industry and our business, but we can ensure that we’re at the forefront of decision-makers minds on projects that require an expert facade installer.”
If you would like to know more about how we work, or would like our help with an upcoming project, contact us on 01268 744 199 or office@edenfacades.co.uk.
