The UK construction industry continues to grow overall, with commercial building and civil engineering continuing to expand.
However, soaring interest rates are making a big impact on residential construction, pushing the sector back to pandemic levels.Higher interest rates result in higher borrowing costs, which in turn leads to reduced demand.
The latest report on the industry shows work on residential building sites declined in May to its weakest level since 2009, excluding pandemic times when sites were locked down. The industry is still facing lingering red tape from Covid-19 also.
The hikes have had the greatest impact on project funding, making them more expensive due to the cost of construction materials increasing. Suppliers have been forced to raise their prices because of the increased cost of financing on their side. It also reduces the profit as the construction companies could be forced to pay out of their own pockets for increased interest rates on loans.
The rise in interest rates has reduced housing demand as mortgages have become more expensive and simply unaffordable to many. Understandably people looking to buy a property are also grappling with the current cost-of-living crisis, so demand simply isn’t where it was. Additionally, first-time buyers will be fearing house price falls, heightening the risk of falling into negative equity for those buying with small deposits.
To conclude, an enormous amount of work and diligence are needed in the current landscape. When interest rates are low and money is cheap, the possibilities for construction seem endless. But today’s climate and high rates aren’t changing any time soon, which means loans are more expensive, projects are less affordable, and barriers to entry are increasing.