President Donald Trump's administration is renegotiating the North American Free Trade Agreement and had threatened to withdraw from the agreement.
This has led to a spike in the cost of lumber, a major Canadian export to the US, amid rising costs of land and construction workers.
According to Capital Economics, higher lumber prices could prompt homebuilders to focus on more expensive housing to protect their margins, even with a shortage of affordable housing relative to demand.
The North America Free Trade Agreement is intact, for now, following threats by President Donald Trump to withdraw from it. But the back-and-forth between the US and its neighbors is already shaking up a key component of the housing market, with more disruptions possible.
America is the largest importer of softwood lumber from Canada. Concerns that the US would withdraw from the North American Free Trade Agreement have contributed to a jump in lumber prices since early this year. The benchmark random-length lumber futures contract jumped last week to $440 per thousand square foot, the highest in four and a half years.
"Given that lumber accounts for a relatively small share of overall construction costs, on its own that development will have a minimal impact on homebuilding activity," said Matthew Pointon, a property economist at Capital Economics, in a note on Tuesday.
"But, combined with labor and land shortages, it will only add to the pressure on builders to protect margins by focussing on the higher end of the housing market."
Capital EconomicsThe pressures from higher land and labor costs are encouraging builders to construct smaller single-family homes, Pointon said in a recent note. And prices are unlikely to shrink with home sizes because demand is hot in a strong economy.
Prioritizing more expensive homes could become another way to protect margins, Pointon said, even as more affordable housing remains in short supply, especially in larger cities.
RELATED: Most expensive housing markets in the world
10 Most Expensive Housing Markets in the World
10 Most Expensive Housing Markets in the World
$1,820-$2,020 per square foot Average price change in 2012:+10.8%
Shanghai saw double-digit growth once again in 2012, with prices up by 10.8 percent. However, experts are worried the market may be overheating, with the cost of a home in Shanghai now around 45 times the average resident's annual salary.
These concerns prompted the Chinese government to announce cooling measures on March 4, including the stricter enforcement of a 20 percent capital gains tax on home sale profits. This spooked investors, dragging the Shanghai property sub-index lower by 9.3 percent, its biggest daily loss since 2008.
$2,020-$2,230 per square foot Average price change in 2012: 0.0%
Despite flat property prices in 2012, Sydney is considered to have one of the most resilient residential markets in Australia. The country is also perceived to have a strong economic future, lifestyle advantages and a strategic position in Asia-Pacific.
The government has taken measures to attract overseas investors. In particular, the Significant Investor Visa, geared towards the Chinese, grants you permanent resident status or citizenship if you place five million Australian dollars ($5.13 million) in "endorsed investments."
Experts forecast prime property prices in Sydney will increase in 2013.
$2,030-2,240 per square foot Average price change in 2012: -1.4%
Like London, New York epitomises "safe haven" for property market investors, and is therefore capable of weathering most storms.
Russians -- long an important driver of the London market -- are a growing force in New York, where they face competition from Chinese and Hong Kong buyers. According to Knight Frank, the housing market downturn in 2008 means U.S. luxury markets now appeal to investors looking for value opportunities, which they won't find in the Tribeca property pictured here, priced at $48 million.
Prime sales volumes in New York hit their highest level for 25 years in the final quarter of 2012, as the looming fiscal cliff and potential rise in the capital gains tax weighed on vendors' minds.
$2,040-2,260 per square foot Average price change in 2012: -2.3%
As Eastern Europe's financial center, Moscow attracts buyers from all over Russia and the former Soviet Union. Wealthy Russians like to live or have an apartment in the capital, Knight Frank said.
Due to corruption, the price of some new-builds can rise by 15-to-20 percent by the end of construction, meaning property in Moscow can be a good investment.
Nevertheless, prices fell 2.3 percent in 2012 due to a combination of currency fluctuations and changes in the supply structure.
Many high-end Moscow homes are concentrated in a neighbourhood called the Golden Mile, located between the Moscow River and Ostozhenka Street. This property, located in the city center, costs $9 million per 451 square meters.
$2,340-$2,580 per square foot Average price change in 2012: +0.6%
Property prices in Singapore continued to rise by 0.6 percent in 2012, prompting the government to introduce its seventh round of cooling measures since 2009. New rules, including higher purchase taxes and minimum down payments, led to a sharp fall in shares prices in property firms.
However with significant immigration, the world's densest population of millionaires, and limited land for development (the country is only 700 square kilometers in size), property prices are not expected to plummet anytime soon.
$2,350-$2,600 per square foot Average price change in 2012: -4.0%
Experts say Paris is the city with the most potential to compete with London for foreign property investors. However, it was dealt a dual blow in 2012 by the euro zone crisis, and the new socialist government's proposed 75 percent wealth tax. As a result, property prices fell by 4 percent.
President Francois Hollande's proposals caused more than a few potential buyers to reconsider, and some owners to leave the country. The market saw buyer interest shift to Monaco, the Italian Riviera and Switzerland, according to Knight Frank.
$2,720-$3,010 per square foot Average price change in 2012: -6.0%
Prime property prices fell by 6 percent in Geneva in 2012, due in part to stricter mortgage policies and uncertainty regarding a new set of laws and taxes.
However, Knight Frank said prices in Switzerland are set to rise again, as the country is forecast to see a 27 percent rise in its high net worth population between 2012 and 2022. Strict planning regulations will also curtail new developments in hotspots like Cologny in Geneva, where the house pictured is located.
Geneva's ongoing popularity is explained by its position as a global financial center, its excellent schools, safe environment and the Alpine ski resorts on its doorstep, plus Switzerland's political stability.
$3,890-$4,300 per square foot Average price change in 2012: +8.7%
One of the most renowned safe haven markets in the world, London property prices increased by 8.7 percent in 2012, despite a new stamp duty tax on properties worth over 2 million pounds ($3 million).
The London property market was fuelled by money from continental Europe in the first half of 2012. Then as fears the euro might collapse dissipated during the summer, Europeans buyers were increasingly replaced by those from the Middle East, Asia, Africa and Russia.
The property boom looks set to continue in 2013, with the average price of prime central London property rising by 0.9 percent in February, the highest rate in 10 months, according to Knight Frank. Prices have risen every month since November 2010, and are now 55 percent above the March 2009 market low.
"London is like a separate economic zone, it is the global investment destination of choice among global investors at the moment and I think that will continue," Richard Tice, CEO of property investment company CLS Holdings, told CNBC.
A recent Vanity Fair article on the owners of London apartments, such as the 6,000 pound ($9000) per-square-foot one pictured here, read like a cross-section of some of the world's richest people, including Arab sheikhs, Nigerian oil billionaires, and supermodel Naomi Campbell's Russian oligarch boyfriend, Vladislav Doronin.
$4,570-$5,050 per square foot Average price change in 2012: +8.7%
The Hong Kong property market is so hot the government is fighting to cool it down. Despite new restrictions -- notably an extra 15 percent stamp duty for foreign buyers, including those from mainland China -- the rate of price increase almost doubled in 2012 to 8.7 percent, up from 4.6 percent in 2011.
$1 million will only get you 19 square meters in Hong Kong.
Knight Frank put the city's popularity down to strong demand from both local and international owners, and investors who see the city as an international financial hub with a strategic geographic location and a liberalized economy.
Nevertheless, the government cooling measures are expected to impact property prices and Knight Frank forecast prices will rise by a modest five percent in 2013.
$5,350-$5,920 per square foot Average price change in 2012: 2.0%
The principality of Monaco has a reputation for being a playground for the super-rich. With only 36,000 people, it is renowned for its casinos, yacht-filled marinas and the Formula One Grand Prix.
The price of its property reflects this. $1 million will only buy you 16 square meters in prime central Monaco, with housing developments such as the Tour Odeon, pictured here, going for roughly 60 pounds ($77.9) per square meter.
Top-end real estate in Monaco has benefited from a shift away from Paris, with prices up 2 percent in 2012 after France proposed a 75 percent top rate of tax. In addition, neither individuals nor companies resident in Monaco pay income or business tax, making it likely to remain a favorite destination for investors looking for safe haven assets.
Pointon estimated that, based on a typical requirement of 20,000 sq. ft. of lumber for a new home, the price increase since November added $2,000 to the cost of construction. That's less than 1% of the median price of a home.
So higher lumber costs themselves are not the problem. But this price hike is being driven by fears of lower supply, not weaker demand, in an environment where other construction costs are rising and affordable housing is in limited supply.
That's the worrying combination that could slow down housing starts and tighten the non-luxury section of the market even more, Pointon said.