How the trade war is impacting California real estate

With the sixth-largest economy in the world, California is an attractive place for business and investment. Foreign investment, in particular, plays a significant role in California’s economy and real estate market.

However, the rising perils of an international trade war threaten to spill over into the state’s real estate market. The effects are playing out across California’s residential and commercial markets, raising prices and adding hurdles from investment to construction to sale.

Commercial, multi-family impacts

In March 2018, the administration instituted a tariff of:

• 25% on imported steel; and
• 10% on imported aluminum.

While new single family residence (SFR) homes rely very little on steel or aluminum in the building process, commercial buildings rely heavily on these materials. Therefore, in the residential space, new construction of multi-family condominiums and apartment buildings has already become more costly for builders, according to MarketWatch. Much of this cost will be passed along to renters and homebuyers.

The implications are especially significant for California, which is in dire need of more multi-family construction. Most of the new homes being built here are in the high tier, where the potential for builder profit is highest. But recent legislative efforts have focused on encouraging builders to construct more affordable, multi-family buildings in the state’s heavily populated coastal cities.

Further, many of California’s real estate investors who are investing in (read: financing) commercial and multi-family buildings across the state are from the nations the administration set these tariffs against!

Consider this: acquisitions and investments from China into the U.S. fell 92% from January to May 2018, according to CNBC. Coupled with the sell-off of $9.6 billion in U.S. investment, China’s net investment in the U.S. was negative during this time. While part of this decline is due to the trade war and tightening immigration rules, some of this is due to government intervention originating in China.

This is especially worrying for California, which traditionally is the state with the highest number of foreign direct investors.

This stepping in by both governments prevents investment in major developments. But it doesn’t necessarily dissuade international buyers who want to purchase SFRs to live in.

SFR impacts

The tariffs on steel and aluminum have little bearing on SFR construction, as SFRs are made mostly of wood, or lumber. But there’s bad news there, too: the administration initiated lumber tariffs on Canadian lumber in 2017.

At the time these lumber tariffs took effect, the cost of building materials was already rising rapidly. Now, the rising cost of lumber caused the average new home price to increase $9,000 from January 2017 to June 2018, according to the National Home Builders Association (NAHB). While prices have since fallen back, this is due to lower demand for materials, and not due to the removal of tariffs.

Many of these costs are passed onto the homeowner — evidenced by the increase in new home prices — but builders are also experiencing significant losses. The NAHB estimated in 2017 that the Canadian lumber tariffs would cost, nationally:

• roughly $500 million in wages;
• $350 million in federal and state tax revenue;
• more than 8,200 full-time jobs;
• $945 million in SFR investment; and
• $146 million in multi-family investment.

One may point to Canadian lumber mills as the source of the problem, insisting that the mills take a cut from their profits in order to ensure the same level lumber cost for builders and homebuyers. But these same mills that were raking in the profits just a year ago are now being forced to make cutbacks due to the combination of slowing demand and U.S. tariffs.

Here in California, the impact won’t be as pronounced as elsewhere in the U.S. That’s thanks to the state’s widespread housing shortage, which leaves homebuyers hungry for new homes, even when they are significantly more expensive than just a year or two before. Thus, while it may not mean fewer homes will be built or sold, these tariffs will translate directly to more money paid by homebuyers.

Homebuyer impacts

Another set of tariffs initiated in early 2018 that impacts homeowners and homebuyers are the administration’s tariffs on:

• solar panels — a 30% tax on imported solar panels and solar energy cells after the first 2.5 gigawatts of solar cells are imported; and
• washing machines — a 20% tax on the next 1.2 million imported washing machines and a 50% tax on any additional washers imported in the next two years.

The tariff on solar panels is a blow to California, which has one of the fastest growing solar markets in the world. The Solar Energy Industries Association (SEIA) estimates the tariffs will cost 23,000 jobs nationwide due to the higher cost of solar components. Most of these workers who will lose their jobs are solar installers. The thinking is that since no one needs solar, fewer homeowners will choose to purchase and install solar panels as they become more expensive.

Related article:

What’s behind Trump’s tariffs on solar and washing machines

But, again, California finds itself in a unique position on this solar tax.

In mid-2018, California became the first state to require nearly all new homes to include solar systems, beginning in 2020. While including solar systems on new homes would have cost more money anyway, the addition of tariffs on imported solar parts means the new requirement will cost even more. The California Energy Commission estimates the demand for solar systems, along with other required energy efficient improvements, will increase the average new home cost by $9,500.

Further, while homebuyers won’t see much direct impact from the tariff on the other home appliance taxed — washing machines — it will certainly impact homeowners, landlords, renters and anyone else who enjoys having clean clothes to wear (oh wait, that includes homebuyers, too).

The takeaway from additional tariffs is this: buying and maintaining a home is now more expensive than it needs to be.

However, California’s housing shortage — many call it a crisis — means homebuyers’ appetite for homes will not be diminished. Instead, homebuyers will continue to pay more money to purchase, leaving less of their income available for things like healthcare, transportation, consumer purchases, travel… essentially, less will be left for residents to enjoy the high quality of living that is becoming increasingly difficult to attain.