In recent months, President Donald Trump has increased the tariffs on Chinese imports and announced plans to place a 25% tariff on all goods coming from our two largest trading partners, Canada and Mexico.
Beyond that, the Trump administration has talked of placing 25% tariffs on all aluminum and steel imports, as well as implementing “reciprocal tariffs” on U.S. trading partners as soon as this month.
It’s unclear whether the currently proposed tariffs will become reality. For instance, Trump had implemented tariffs on all Canadian and Mexican imports in March, only to announce a one-month delay a few days later.
Whatever the outcome of these announcements, the Trump administration has decided that tariffs are an important part of its trade strategy. The administration’s approach to tariffs is grounded in the belief that these trade restrictions would benefit the U.S. economy by reducing trade imbalances, protecting American jobs and stimulating domestic industries.
The central economic logic behind the Trump team’s view is to leverage these taxes on imports to pressure foreign governments into better trade deals while simultaneously encouraging the revitalization of American manufacturing. Trump frequently describes the U.S. as suffering from massive trade deficits with countries such as China, Canada and the European Union.
“The effects of international tariffs on real estate markets, for instance, can be profound. Tariffs influence construction costs, interest rates, housing prices, inflation, and, crucially, the cost of financing real estate projects.”
According to the Trump team, tariffs would serve as a corrective mechanism to restore balance in global trade. By imposing tariffs, the Trump administration is seeking to level the playing field by increasing the cost of foreign goods and services entering the U.S. market.
Real estate impact
This perspective is not shared by most economists who say such tariffs will likely lead to higher inflation. Other countries will be forced to retaliate, and the result could be a trade war that is extremely difficult to unwind.
Whether right or wrong, international tariffs have long been an essential tool of trade policy that governments use to regulate economic relationships with foreign countries. Tariffs are often discussed in terms of their immediate effects on industries such as manufacturing, agriculture and consumer goods. Their impacts, however, on other sectors, such as the domestic real estate market, are less frequently explored.
The effects of international tariffs on real estate markets, for instance, can be profound. Tariffs influence construction costs, interest rates, housing prices, inflation, and, crucially, the cost of financing real estate projects.
For the real estate market, the most direct effects come through the increased cost of construction materials. The U.S. imports substantial quantities of products such as steel, aluminum, cement and lumber. When tariffs are levied on these materials, the cost of construction increases. These cost increases can ripple throughout the residential and commercial property markets, as developers face higher input costs, which are typically passed on to consumers in the form of higher home prices and rents.
According to the National Association of Home Builders, tariffs on imported wood, steel and aluminum, for example, significantly raises the cost of building new homes, potentially adding thousands of dollars to the price of the average property. In turn, developers face higher overall costs, which are likely to be passed on to consumers, raising prices in both the residential and commercial sectors. They are also likely to delay planned projects, further exacerbating housing supply shortages and pushing home prices higher in the overall market.
Rising costs
Moreover, tariffs can have broader macroeconomic effects. Rising costs due to tariffs can lead to higher inflation, prompting central banks, such as the Federal Reserve, to raise interest rates, which makes borrowing more expensive for homebuyers and developers alike. This, in turn, impacts long-term financing options for real estate acquisitions and construction, influencing both residential and commercial real estate markets.
Interest rates play a crucial role in determining the affordability of real estate, both for homebuyers and for developers seeking financing. The Fed uses interest rates to manage inflation and stabilize economic activity. When tariffs increase the cost of goods and services, including construction materials, they contribute to higher inflation. The Fed may respond to rising inflation by raising interest rates to cool down the economy and reduce price pressures.
Higher interest rates translate into higher mortgage rates. When mortgage rates rise, the monthly payments for homebuyers increase, reducing their purchasing power. This can lead to reduced demand for housing, as potential buyers are priced out of the market.
This also can affect real estate investors, particularly those reliant on leveraged financing to acquire properties or develop new projects. As financing costs rise, investors may find that the potential return on investment no longer justifies the additional cost of borrowing.
Higher rates would also reduce the demand for refinancing. This, in turn, reduces the liquidity in the real estate market and can slow overall activity.
Economic impact
For renters, inflation often translates into higher rents, as landlords seek to pass on increased operating costs to tenants. As the cost of living rises, renters may face greater financial strain, especially in high-cost areas. At the same time, more people may choose to rent rather than buy, increasing competition in the rental market and driving up rental prices even higher. For homeowners, inflation can erode the real value of their property, especially if wage growth does not keep pace with rising costs.
Tariffs have broader economic implications that indirectly affect real estate markets. When tariffs disrupt trade, they can create uncertainty in the global economy, leading to a slowdown in investment and consumption. As businesses face higher costs and decreased profit margins due to tariffs, they often will reduce investment in commercial real estate, which can slow down the growth of office buildings, retail spaces and industrial properties.
In addition, tariffs can lead to lower levels of foreign direct investment in U.S. real estate markets. For many years, U.S. real estate has been a popular asset for international investors due to its perceived stability and profitability. However, when trade tensions rise and tariffs increase the costs of development, foreign investors may become more hesitant about investing in U.S. properties.
Investor risk
The increased cost of financing resulting from tariffs can also affect long-term investment strategies in the real estate market. Investors, both domestic and foreign, typically seek stable, predictable returns on their real estate investments.
When tariffs cause construction costs to rise and financing conditions to tighten, the risk associated with real estate projects increases. As a result, investors may require higher returns to compensate for this additional risk.
For real estate developers, the increased cost of financing due to higher interest rates can make previously viable projects less attractive. This could lead to fewer new developments, particularly in speculative markets or in regions where returns are not guaranteed.
Higher rates and increased market volatility could lead to shifts in investor behavior. Some investors may move away from real estate and toward other asset classes that offer higher or more stable returns, such as stocks or bonds. This shift in investment strategies could further slow the growth of the real estate market, particularly in sectors that are highly sensitive to economic cycles, such as commercial real estate.
Past Experience
Of course, we’ve been down this road before. In 2018, the first Trump administration imposed 25% tariffs on steel imports and 10% tariffs on aluminum imports from both Canada and Mexico. These measures were aimed at protecting U.S. industries from what he deemed unfair foreign competition.
The tariffs were lifted a year later as part of the negotiations to secure the United States-Mexico-Canada Agreement, the trade deal that replaced the North American Free Trade Agreement, but they caused significant tension in trade relations.
Canada and Mexico retaliated with their own tariffs on U.S. goods, including agricultural products like pork and whiskey, which impacted U.S. businesses and farmers. The 2018 tariffs, however, were limited compared to the ones being discussed today and didn’t lead to inflation. But economists think the more comprehensive tariffs on the table now could prove very damaging to the economy of all the countries involved.
International tariffs, while often discussed in the context of trade policy, have far-reaching effects on the domestic real estate market. Through increased construction costs, inflationary pressures, higher interest rates and shifts in investment behavior, tariffs can significantly influence both the acquisition and development of real estate.
In the long term, the cumulative effects of tariffs on the real estate market could lead to higher housing prices, reduced supplies and a shift in investment strategies. Understanding the complex interplay between tariffs, construction costs, interest rates and financing is essential for predicting the future trajectory of the U.S. real estate market. Government officials need to carefully consider the potential consequences of trade policies on the real estate market and ensure that the costs of tariffs do not undermine the affordability and accessibility of housing for American families.
