It is hard to keep up with the ever-escalating trade war between China and the U.S. without having an in depth knowledge of finance. Both countries have listed thousands of goods worth billions of dollars and then levied varying taxes against them. Trump and his team have been careful not to tax everyday use items for Americans. Nevertheless, the market that has the most general impact on Americans may be in trouble. Here are potential effects that the U.S./China trade war could have on the American real estate market.
Real Impact on Real Estate
Amongst the first goods to be taxed by the U.S. was steel, which received a 25% tariff. 6% of steel imports come from China. In regular single family homes, steel only makes up 1% of construction costs. New high rises, condos, and apartment buildings, however, use up significantly more steel. According to Statista, 40% of steel demand came from came from construction in 2017. This includes commercial and residential use. The rise in steel costs could cause a rent hike in apartments and condos.
This would not be the first time tariffs have increased the price of residential units. Hoping to create American jobs, Donald Trump levied a 20% tax on Canadian lumber imports. Canada provides one third of all lumber in the U.S. Since then, lumber prices have risen 15%. This in turn led to a 6 to 10 thousand dollar increase in median housing values.
Trade Wars and Interest Rates
Any trade war can raise interest rates. This is because trade wars drive inflation. Usually, consumer goods become more expensive when wages rise and demand grows. When tariffs are imposed on imported goods, prices rise artificially, giving the dollar less purchasing power. This could cause the Federal Reserve to increase interest rates in order to combat inflation.
China, however, has particular power over inflation rates in the United States. China is the United State’s biggest foreign creditor, owning 19% of all treasury notes. This is worth US $1.17 trillion. As the Federal budget increases, the U.S. government needs to sell increasing numbers of bonds in order to finance governmental operations.
According to Bloomberg, China is considering buying less treasury bonds in response to U.S. tariffs. This is because in terms of exports, China at a disadvantage. The U.S. imports far more Chinese goods than China imports, meaning that the Chinese export market is more dependent on the U.S. than the American export market is on China.
Should China buy less notes, the Federal Reserve may be forced to raise interest rates in order to make bonds more attractive to buyers. Conversely, if China increases sales of US bonds, too many dollars could flood the market, causing inflation and also leading to higher rates.
Interest Rates and Real Estate
Should rates increase, the real estate market would suffer. Mortgage rates would increase, making it harder for buyers to pay for homes. This could be very bad news for a country so recently hit by recession.
Prices across America are reaching pre-2008 highs at the moment. Banks and borrowers alike are wary of high mortgages on high-priced houses. If mortgage rates were to increase, home sales would decrease significantly. Most of all, there could be stagnation of the moving market. If homeowners have a low mortgage rate, they may be reluctant to move houses.
This could decrease available properties in high demand areas, driving prices even higher and increasing the risk of a sharp correction as buyers are priced out of the market.
Last, but certainly not least, the tariff war could be a deterrent to international investors. Foreign Direct Investment (FDI) fell 90% in the first half of 2017. Chinese investors played a large part in this, selling $9.6 billion dollars worth of U.S. assets. This resulted in negative net flow of FDI from China to the US.
This could have major implications on real estate markets. International investment is a huge part of the luxury market, and Chinese investors in particular. If relations with China worsen, more and more investors may choose to stay away from the U.S.
All in all, the trade war could have far reaching and detrimental effects on the U.S. real estate market. However, it might not get that far. All of these impacts could be mediated by a trade agreement between the two countries. Should tensions continue escalating, however, the real estate market could see some rocky times ahead.