Posted by Oliver Meredew on January 23rd, 2017.
2017 could well be a notable year for the US property market. For one thing, the highest office in the country, the Presidency, has now passed from 8 years under Barack Obama to Donald Trump – who was himself a property tycoon.
Trump’s astonishing ascent to power in 2016 culminated in a shock election victory in November, but before winning the vote, Trump made an almost innumerable number of claims and pledges about what he would do if elected President.
Many of these radical proposals have the chance to directly or indirectly influence the US property market in 2017. In this article, we’ll be running through what the first year of President Trump could do to US property prices, as well as what that means when it comes to buying up or selling off real estate in the USA.
President Trump made his name in the property market as the head of a global luxury empire, but now that he’s in the top spot in the US, will he be able to replicate this apparent success?
On the face of it, Trump’s policies have been a little thin on the ground when it comes to direct housing and property initiatives, although there are still claims and broader proposals that might end up making waves in 2017.
While not the most-touted of Trump’s repeal policies, the plan to dismantle the Dodd-Frank Act remains one that could cause a seismic shift in the US property market.
The Act was created by the Obama Administration after the late 2000’s financial crash, to prevent such a level of economic turmoil from happening again.
These preventative measures crucially include heavy regulations on banks and lenders, to try and stop reckless mortgage practices and abusive lending. Trump’s stance on the act has been;
‘Twenty-five percent of the cost of a home is due to regulation. I think we should get that down to about 2 percent’.
At present, the trade-off is between having harder mortgage access but greater stability under Dodd-Frank, but a potentially more active and unstable market with the bill repealed.
Predictions have been that removing the regulation could be a hard-fought battle for Trump, but if he does manage to repeal the bill, Eight Bridges Capital Management Partner Jeffrey Miller has forecast that;
‘A revision or removal of some of the worst of the regulations, particularly for mortgages, will be very beneficial for consumers’.
Further supporting this attitude has been Federal Reserve Chair Janet Yellen, who stated that;
‘Demand for housing is still being restrained by limited availability of mortgage loans to many potential homebuyers’.
If Dodd-Frank is repealed, demand for US property is expected to increase rapidly, due to freed-up mortgaging conditions for prospective buyers. This would increase US house prices, for both buyers and sellers.
On the flipside, however, Capital Economics Property Economist Matthew Pointon has highlighted that;
‘Pretty soon, the next generation would find themselves struggling to qualify for sufficient mortgage finance. And, as we learned just a few years ago, loosening lending standards can lead to dangerous housing and credit bubbles, which cause real damage when they eventually pop’.
One key factor for US property prices as touched on in the previous point is supply – if there are less houses than there is demand, US house prices are naturally going to rise.
On this front, one of Trump’s particularly worrying proposals has been his so-called ‘Penny Plan’ to cut taxes for US citizens; in order to make up the difference, Trump plans to cut government spending by 1% on most national sectors barring defence every year, for 10 years.
Lower taxes across the nation would raise incomes and – by extension – property demand, but it would also have a profound sting in the tail in the future. With most government departments seeing their budgets cut year-on-year, it would be harder to implement and execute projects like homebuilding and refurbishment plans, limiting the supply of available property and further bumping up prices on existing sites.
If the supply of properties in the US fails to climb, national prices have little chance of falling given that, as Chief Economist of the National Association of Realtors Lawrence Yun puts it;
‘Nearly all home sellers are also home buyers, and thereby not truly providing a net increase to the inventory’.
Yun has highlighted just how dire the situation could be under Trump, estimating that;
‘We need a few years of above-normal construction activity, say 1.7m housing starts per year. However, based on projections of housing starts of 1.3m in 2017 and at best 1.4m in 2018, if proven true, then we are in for a housing shortage for at least four more years’.
The government body in charge of housebuilding in the US, the Department of Housing and Urban Development (HUD), has Republican election candidate Dr Ben Carson at its head (chosen by Trump).
Controversially, Carson has been highly evasive when responding to questions about impartiality, refusing to confirm that no HUD funding will go towards any of Trump’s property developments or business interests, which raises serious concerns about just how well the Department’s funds will be spent.
Carson additionally has no prior experience in the public housing sector, his profession being that of a surgeon before the appointment.
Something that could lower property prices in 2017 is the Federal Reserve, the US central bank.
The Fed has been broadly tipped to raise the US interest rate three times in 2017, from the current 0.75% to 1.50%. One recent proponent for a steady course of US rate hikes in 2017 has been Fed official John Williams, who has stated that;
‘In the context of a strong economy, it makes sense that the FOMC has undertaken a process of raising interest rates’.
This ‘strong economy’ is based on the assumption that Trump will follow through with his pledges to massively boost US jobs and incomes.
If these predicted rate hikes go ahead, the cost of property in the US could fall due to reduced demand. While potential buyers and investors may still want to get a foothold in the US market, higher interest rates mean higher mortgage repayments, so making a purchase or investment will become less attractive.
Raising interest rates generally strengthens the US Dollar as well, which will make it more expensive for investors based outside the US to buy US property. On the other hand, a strong USD could prove more lucrative for someone selling US property and then converting the funds to another currency.
Perhaps Trump’s most ambitious plan for the future has been the construction of a gargantuan border wall with Mexico, which would pass through the south-western states of Texas, New Mexico, Arizona and California.
While the proposed height of the colossal construction has never been properly set out, Trump’s statements when campaigning alternately put the height at between 35 to 80 feet. Higher than the Great Wall of China, this monument to anti-immigration policies would likely damage nearby property prices on the US side of the border, given its likely status as something of an eyesore.
Conversely, a more positive pledge to go spend-happy on national infrastructure could have a net positive effect on property prices, as better connectivity via improved internet access and greater access to basic utilities makes properties more desirable.
However, there is no silver lining without a cloud and Digital Risk Managing Partner Jeffrey Taylor has warned that;
‘Trump’s plan to spend money on infrastructure projects around the country could result in more labourers taking those jobs and leaving homebuilders short-handed. Also, his immigration stance is likely to keep immigrants out of the country and out of the workforce, a blow to homebuilders who rely on immigrants for many construction jobs’.
With less construction workers building homes, their wages are likely to increase; this cost has been forecast by some to be passed onto the buyers of finished properties.
Speaking of the property construction industry, Trump has been notably hostile towards outside investment in US real estate from wealthy foreign interests; if this attitude continues and funding from outside the US dries up, then ballooning house prices could be the result.
Commenting on the issue, Redfin Chief Economist Nela Richardson said;
‘Any notion that [foreign] investment in high-end US housing may be put at risk by an aggressive clamp down on immigration may…lead to some contraction in this sector of the market’.
While many of Trump’s plans for the US from 2017 to 2020 might seem extraordinary on paper, it is worth remembering that his party, the Republicans, have majority control over both the Senate and the House of Representatives.
This will make passing his plans through Congress and into law that much easier than it was for Democrat Barack Obama, who historically struggled with sizable Republican contingents in the two Congress blocks.
As this article shows, Donald Trump’s Presidency will create lots of interesting variables when it comes to the future direction of US property prices. While some developments could drive property values lower – making an investment in property in the nation more affordable/potentially more lucrative – other policy shifts could see prices (or the cost of mortgage repayments) spike.
If you’ve been considering investing in, or selling, US property in 2017, keep an eye on the latest news from the Oval office and seek impartial advice if you need additional support.
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