How Tariffs Impact Real Estate
For those less familiar with tariffs, we will first define a tariff and how it works in practice. A tariff is a tax imposed on a good or service by the recipient country and is usually a percentage-based tax on the whole value of the good or service. Let’s say there is a 25% tax on avocadoes and avocadoes cost $1.00 without the tariff. Once the tariff is imposed, keeping all else equal, the imported avocado now costs $1.25. This is a simplified version of the immediate impact of a tariff.
In economic theory, a tariff has the effect of reducing demand for the imported good due to its higher price. Let’s say that an avocado grown in California costs a consumer $1.15 per avocado. The imported avocado is now more expensive compared to the domestically produced avocado. Either the exporter can lower its price to stay competitive or it will sell less. The impact is two-fold in this scenario. The consumer pays more for the avocado, and the exporter (if they price match) makes less profit or no profit on the sale of their avocadoes due to the import tax.
Usually, the winners and losers are easy to identify. Domestic producers enjoy more demand due to their competitive advantage on price, which has the effect of increasing gross domestic product. The losers are typically the exporting country since they must either charge less which (equals less profit) or sell less of the product in the tariffed market. Alternatively, the foreign producer could instead sell to other markets with less or no tariffs. Obviously, the foreign producer may be able to modify their production costs to protect their profit margins. In all, a tariff results in negative outcomes for the consumer and the foreign producer and a positive impact on domestic producers, fiscal deficit, and national GDP.
Tariffs trickle through the real estate economy in a variety of ways. Any items that go into the production of real estate could be impacted from tariffs. Perhaps the biggest losers are real estate developers. Real estate developers need to purchase raw materials to construct their projects. Everything from the wood that goes into framing imported from Canada to the roof shingles made in China could increase in price through the implementation of tariffs. Higher prices on the inputs of production equals less profitable projects. In the case of real estate, the tariffs cannot be immediately passed on to the consumer. Instead, today’s increase in costs lead to a pass-through effect on the end users of the real estate, the tenants, through higher rents charged. Potentially, if the increase in costs from the tariffs is high enough, new development may never get out of the ground due to financial non-feasibility.
The effects of tariffs on existing real estate are likely to be more subtle or have an indirect impact. Retaliatory tariffs from a trading partner on a sensitive industry could put financial pressure on the domestic companies that produce the tariffed goods. For example, let’s say that Canada placed a 30% tariff on US made automobiles. US automakers may become totally non-competitive in the market due to the increased price and sell very little new cars. The automakers would then potentially need to re-scale their business by closing factories or laying off workers. Ultimately, those workers could then become distressed or displaced. This could have the effect of reducing their consumption of goods and services. It’s difficult to speculate on how this could play out due to the very local nature of real estate and if there are any retaliatory tariffs placed on domestic producers.
According to the World Bank, there are 185 countries that impose tariffs. In this same data set, Bermuda has the world’s largest weighted tariffs at 29.5% while the United States comes in at 1.5%.
Here are some interesting tariff rates we found on goods around the world courtesy of www.privacyshield.gov:
- Bermuda charges a 75% tariff on the first $10,000 in value on imported automobiles and a 150% tariff on value above $10,000
- Belize charges a 45% tariff on imported boats. Tariff revenue for Belize is 50% of the government’s total annual recurring revenue.
- Cayman Islands charge a 22% tariff on imported wedding dresses (for residents getting married in Cayman)
