Interest rates are impacting all industries, including construction. Take a look at what economists are saying about the situation in 2023.
Interest rates have jumped dramatically in Australia over the last year and construction businesses have been caught up in the fallout.
The rising costs of loans, materials and labour have made things tricky for many providers but there are still positive stories to come out of the doom and gloom.
Take a look at what economists are saying about current conditions and find out how to offset the impact of rising interest rates.
How are rising interest rates impacting the construction industry?
During the pandemic, low interest rates and government funding caused a flurry of activity in the construction industry across residential, infrastructure and commercial projects.
However, what goes up must come down. As reported by news.com.au, the rise in interest rates means building approvals have dropped significantly over the last twelve months. In March of 2023, statistics showed that permits to build new private sector homes dropped to 13.8 per cent, making for five months straight of decline and the lowest level in over ten years.
In addition to this, many contracts are being cancelled. One company in the Albury-Wodonga region on the NSW/Victoria border said they had up to 40 cancellations on one housing estate, all due to fears around rising costs.
Smaller companies are also struggling to meet their commitments. As explained by McGrathNicol chairman Jason Preston in Broker News, many builders have, “multi-year contracts, the contracts were signed some time ago, and the cash impacts of costs going up and delays start hitting towards the middle and back end of the contract.” The result of this is businesses going under before they are able to bring projects to completion.
In terms of commercial projects, US property finance company GetBuilt pointed out that construction is a “cash-hungry business, and contractors, real estate developers, and lenders work together to fuel it.” The challenge caused by rising interest rates is accessing capital; and high interest rates mean less capital is available. The ‘double whammy’ is materials and labour costing more, as well as loans.
While some reports say these issues are contributing to developers “sitting on the sidelines” in 2023, there are still opportunities available and it’s not all bad news.
What’s important to remember is that current conditions are a ‘contraction’ but also the result of the interest rate ‘pendulum’ swinging wildly in borrowers’ direction during COVID. The record lows were fantastic, but an adjustment was always inevitable.
And there are glimmers of good news. For example, ANZ Research recently reported that there are some encouraging signs that supply constraints have started to ease and that overall inflation may have peaked for construction inputs. Meanwhile, the global acceleration in decarbonisation plans is forecast to add to infrastructure activity. In Australia, rebuilding after widespread flooding in 2022 is adding to the pressure to keep projects moving and keeping funds flowing into the construction industry.
Offsetting higher interest rates
Budgets have tightened because money is harder to come by in 2023, but this doesn’t mean construction projects cannot go ahead.
What’s most important for anyone embarking on an infrastructure or commercial development project is to access the right advice, complete thorough due diligence and find ways to minimise costs as well as risk.
This may mean reducing scope or working with an Australian supplier as a way of side-stepping the high costs of importing from overseas. It’s also important to find efficiencies wherever possible, for example by working with BIM and 3D modelling to reduce the possibility of design issues interfering with the construction process.
Australian Tanks is a home-grown supplier
Australian Tanks is experiencing strong demand from infrastructure and commercial building projects despite rising interest rates. As an Australian supplier, we are proud to manufacture locally and have recently added an expanded manufacturing yard so we can deliver tanks and OSD systems in accordance with our clients’ timelines.
Our team works hard to ensure value for money, quality products and timely outcomes on all water tanks, pump stations and OSD products. Contact us for a quote on your project today.
