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The Canadian Lumber Tariff’s Possible Effect on Apartment Construction

New Levy will Increase Costs

By Louis Rosenthal | Friday, April 28, 2017

 

The Trump administration has imposed a 20% tariff on Canadian softwood lumber, reigniting a decades-old conflict and raising the specter of a full-blown trade war with our northern neighbor.

Because the U.S. relies heavily on Canadian softwood for home and apartment construction, those in the multifamily industry are rightfully worried about what a tariff would mean in the midst of a bona fide construction boom. Since past is prologue, the industry’s experience during the last major trade dispute under the George W. Bush administration illuminates what we should realistically expect from the tariff.

The softwood lumber dispute, at its core, concerns the relative involvement of the public and private sectors in determining the price of lumber. In the U.S., competitive market forces set the price of lumber, as most timberlands are owned by private entities. In Canada, however, the majority of the timberlands are held by the government, with each province establishing a set fee for their use. The pronounced role of government in setting Canadian lumber prices has led to allegations that Canada is unfairly subsidizing lumber, undercutting U.S. competition.

The concern among homebuilders (single-family and multifamily) about the tariff’s impact is not without merit. Softwood lumber and housing construction are closely related in that demand for the latter fuels the former.



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Since the 1960s, the rate of softwood lumber consumption by U.S. builders has correlated strongly with the change in residential housing starts, Axiometrics has found.

On the other hand, softwood lumber may not be a major contributor to rising construction costs, perhaps only 15% of the cost of building a new home — which translates to about $7,500 for an average single-family house. Furthermore, of all the residential construction input costs, softwood lumber is one of the cheapest.

Nevertheless, Canadian lumber is a significant component of all U.S. lumber consumption.



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The share of Canadian imports of softwood lumber as part of U.S. consumption has grown considerably since the mid-1960s. Canadian imports represented more than 30% of all U.S. consumption from 1993-2007, peaking at 35% before the housing crisis. Canadian softwood has represented about 26% of all U.S. consumption since the Great Recession.

Given these factors, is a new lumber tariff uniformly bad news for the housing industry and the multifamily housing industry in particular? For one, the impact of Canadian softwood on housing construction markets is anything but uniform.



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In 2016, Washington state imported the highest share of Canadian lumber (8.3% of total U.S. imports, or almost $650 million). The second largest importer in 2016 was Texas (5.8% of imports, or almost $450 million). This is further evidence of the close relationship between housing market indicators and consumption of softwood lumber, as Texas has one of the hottest construction markets — particularly in multifamily — in the U.S. The fact that other large states like Florida and California are not among the top 10 importers suggests that local housing environments can play a large role in the extent of exposure to Canadian imports.

Furthermore, the early 2000s lumber dispute with Canada (called Lumber IV) appeared to have little to no impact on the multifamily housing market. This makes sense given that lumber is only a minor component of total construction costs, and because the demand for lumber is itself a product of demand for new housing.

Ultimately, a new tariff on Canadian lumber would very likely have a muted effect on the U.S. economy and residential construction. A larger concern is the possibility of a full-blown trade war with Canada if the Canadian government retaliates against the Trump administration’s trade policy. This is not completely out of the question, since the last time the U.S. was in a major lumber dispute with Canada, a Canadian official announced the government’s intention to, “identify a number of products where a tariff on U.S. exports can be applied without serious damage to the Canadian economy and, hopefully, with maximum impact in the U.S.”

Fortunately, the Lumber IV dispute ended with both sides backing down and consenting to a decade-long agreement governing lumber imports and exports. Will the Trump administration do the same?

 

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on Forbes.com and Axiometrics’ blogs, among others.

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