Correlation of interest rates and construction
December 27, 2024

Learn more about the correlation and impacts seen on the construction industry due to high interest rates.

Ever since the pandemic in 2020 interest rates have been significantly high. The Federal Reserve did this to try to reduce inflation, but it has been harming businesses and industries. While interest rates are allegedly supposed to go down throughout 2025, they are still affecting businesses. One industry that is perpetually harmed by high interest rates is the construction field.

But how is the construction industry affected by high interest rates? Keep reading to learn more about the correlation and impacts seen on the construction industry due to high interest rates.

 

Why are interest rates so important in the construction industry?

Interest rates affect the borrowing costs for construction projects. Due to this, it becomes very important that contractors fully understand the impact interest rates have on their projects. Interest rates can change who is willing to invest in your project, so contractors need to be precise when deciding what types of projects, they will profit from most.
 

Now that this has been established, let's dive more into the effect interest rates have on the construction industry.

 

Increase in project costs due to high-interest loans

It's very common for construction developers to have to take out loans to be able to afford the materials necessary to get the job done. However, since interest rates are so high it becomes expensive to borrow money for projects. This makes construction projects more costly than they would have been when interest rates were lower. This leads to too many projects becoming unaffordable and causes investors to take a pause on funding projects which makes project progress slow.

 

Redirection of project choices

Since high interest rates cause everything to be more expensive, contractors must select projects that are the least financially draining and worth it. It's simple, a project needs to be profitable for businesses to make back the money to pay off their loan. This changes the projection of what projects businesses are willing to take on. Another important factor that has been seen is that certain banks would rather lend money to more profitable projects. Which also greatly shifts the focus of what projects are being started in the construction industry.

 

Stricter lender evaluation

The high interest rates are making fewer people want to borrow money from banks. This has become a problem for the banking industry. This has caused banks to increase their cautiousness and requirements when approving loans. So, now, banks want lenders to have more of their own money available to fund their projects, while they shrink the amount of money they are willing to lend. This has made it harder for businesses in the construction industry to have more available money for other expenses. Which essentially, slows down the productivity of construction projects.

 

Changes in client demands

Interest rates also impact the amount of money that potential clients can borrow for projects. If a client can't afford a project, then they simply won't take out a loan for it. Overall, this will reduce the demand for Construction Services which will negatively affect the industry. However, if you educate yourself on these interest rate trends then you will be able to plan to help put your business at an advantage.

 

Changing interest rates are a topic that every business needs to consider. This is especially true for construction since it is an industry that, in many cases, involves borrowing money. Everybody is affected by interest rates, and it can be tough to avoid the negative side effects that come with them. But staying aware of increases and decreases in interest rates can put your business at an advantage. So, instead of being afraid of the changing rates, educate yourself and plan accordingly to make the smartest decisions for your business. 

Meet the author

Danny Rhoden

KT Black is not just where I work it is also what I do.

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