U.S.-Canada Trade war implications on Canadian real estate
With almost daily headlines about a potential Canada-U.S. trade war, centered around steel tariffs, Canadians are justifiably concerned. As the underdog, Canada is slowly coming to terms with the implications of a trade battle with our largest trading partner.
This will certainly impact our economy, but more importantly for investors, our real estate industry.
Trade war: It’s all about steel
The 25% tariff on steel has the construction industry in Canada on edge. This will drive up the cost of construction - residential, industrial, and commercial. And, the end isn’t even in sight.
According to experts, this will impact the new construction condo market the most. The ongoing tariff battle dramatically increases the prices of structural steel products, primarily rebar.
The price of steel for construction projects across Canada increased 38% in 2018 so far. This is the result of a global supply shortage of steel, resulting from strong housing markets globally. These new tariffs only add the ongoing angst from Canada’s construction community.
Canadian steels producers currently only fabricate about 10% of structural steel used in Canada already, the remainder has to be imported.
Real estate prices in Canada
Who will pay for this additional cost? Home-buyers and investors. Higher prices are only the beginning, as a drawn-out trade war can also lead to job losses and a weaker economy.
New condo construction projects can also be put on hold indefinitely amidst the uncertainty. One major Canadian steel importer has already placed all orders on hold. This sudden surtax of 25% could put many of these importers out of business, placing further strain on condo developers.
Will investors move to resale condos instead of flocking to new builds? Perhaps. As the housing markets in Toronto and Vancouver cool, this added strain will certainly add downward pressure on home prices.
With the ongoing tightening of mortgage rules in Canada, the U.S.-Canada trade war will be yet another reason many Canadians are forced to put off homeownership.
For Canadian real estate investors with robust portfolios, this will put upward pressure on rents and continue to increase the rental pool. Which is mostly a good thing, until affordability becomes affected.
As sophisticated investors, we must always look at both sides of the coin when it comes to macroeconomic events, like the potential for a U.S.-Canada trade war.