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LETTER FROM THE VICE CHAIR

THE IMPACT OF BANK RATES

ON THE BUILDING INDUSTRY

BARBARA SCHERING

LBMAO Vice Chair
CashierPRO Retail Systems Inc., North Bay

ntario’s building markets are undergoing significant Additionally, the increased cost of borrowing can impact pricing
Otransformation, with the Bank of Canada interest rate climbing strategies. Retailers might be compelled to pass on some of the
from 0.50% in March of 2022 to its current 5.0%, prompting a re- increased costs to consumers in the form of higher prices for goods
evaluation of strategies among developers, retailers, and investors. As and services. However, this approach has its risks as it could lead to
the Bank of Canada announces adjustments to its key interest rates, the reduced demand if customers are unwilling or unable to absorb these
ripple effects are palpable across the province’s construction and real higher costs.
estate sectors. Retailers using lines of credit for inventory management might
In the wake of these changes, we’ve seen a noticeable shift in the also face challenges. In retail, the ability to quickly adapt to changing
pace of new developments. Projects that were once greenlit without consumer trends and preferences is crucial. With higher interest
hesitation are now under more scrutinous review as developers rates, the flexibility to stock up on new or seasonal inventory might
grapple with the increased borrowing costs. This heightened be constrained, potentially leading to missed sales opportunities and
caution is not unfounded; the bank rates directly influence the cost reduced customer satisfaction.
of construction loans, which are pivotal in financing new building Retailers operating on thin margins might find themselves
projects. particularly vulnerable, as the increased financial burden could
The residential market, in particular, has felt the impact. Prospective significantly impact their profitability
homeowners, already navigating the complexities of a competitive On the flip side, if a retailer has a strong cash position and less
market, face higher mortgage rates. This has cooled some of the reliance on borrowed funds, they might find opportunities in a high
demand in hot markets, leading to a slight adjustment in housing interest rate environment. For example, they could negotiate better
prices in certain regions. terms with suppliers or take advantage of discounts for upfront
All of the above have a direct impact on most building supply payments, thereby gaining a competitive edge.
retailers. Not only in the demand for products and the cost of supplying In summary, while rising interest rates present challenges for
the product but in the ability for their customers to pay. Lumber and retailers reliant on lines of credit, strategic financial management
hardware stores still extend credit in the form of a house account. With and operational adjustments can mitigate some of these impacts.
slowing housing starts and home renovations, in-house receivables Retailers need to closely monitor their financial health, explore
can quickly change from 30 – 45 average days to pay to a 60 – 90 day alternative financing strategies, and remain adaptable to navigate the
average which impacts cash flow. complexities of a high interest rate environment effectively.
The higher borrowing costs mean that retailers will have to allocate In conclusion, Ontario’s building markets are in a state of
a larger portion of their cash flow to servicing debt. This could reduce flux, influenced heavily by the ebb and flow of bank rates. While
the amount of capital available for other critical operations such as the current landscape presents certain challenges, it also offers
inventory procurement, staffing, and expansion efforts. When retailers opportunities for those willing to navigate it with caution and
cannot invest in these vital areas, it might limit their growth potential foresight. As the market evolves, staying informed and agile will be key
and affect their competitiveness in the market. for developers, investors, and homeowners alike.

4 LBMAO Reporter - March-April 2024 www.lbmao.on.ca