I lived in Vancouver from 2009-2018 and saw the insane price appreciation from money laundering.
The main question people asked about the appreciation was: "is appreciation really being driven up by foreign buyers".
Many came to the answer "no", because foreign home ownership was "only" in the 5-10% range depending on the neighbourhood.
This article lays out the case why foreign ownership % isn't the right thing to be looking at:
1. The goal of a money launderer is to launder as much as possible
2. The goal of a home seller is to sell for as much as possible
3. If the asset being purchased is a home, incentives between buyer and seller are aligned and prices are higher than the non-laundering market would support (esp if there's another launderer who's interested).
4. Since the market for home prices is based on comps, a few launderers can raise market prices substantially
5. Lather, rinse, repeat
The foreigner question was the wrong one to ask, though certainly a large part of the market was driven by foreign investment. The right question to ask -- and the problem to guard against -- was: "what's the impact of laundered money on the market".
BC added the foreign buyer's tax of 15% in 2016[1]. But beneficial ownership laws come into effect on November 30 of this year[2]. The former created a slight disincentive for foreigners laundering $$ to buy. But turns out what was really needed to slow the tide of illegal money flowing into housing was more transparency and disclosure rules.
From what I heard that and having a investment from which the money might shrink but but randomly disappear lead to super unrealistic inflated prices in NY (not all areas) where it's not uncommon that store spaces are left empty for years (even before covid) because they are to expensive but still don't lower the rent. (Because they don't want to rent it out, they only want to pretend that intend to do so.)
> (Because they don't want to rent it out, they only want to pretend that intend to do so.)
Louis Rossmann has a semi-recent YT video exploring one hypothesis: landlords have mortgages that contain clauses in then which specify that if rents have to be a certain amount, and if they drop too much then that means the property value must have dropped.
And if the property value has dropped, perhaps bringing the mortgage closer to being underwater, then the bank may want the landowner to put more equity in it so that adds to the bank's cushion.
And landowners don't want to put more of their own money into a leveraged investment, so they'd rather just deal with the carrying costs rather than trigger an 'equity event'.
The hypothesis was originally put forward in a Reddit comment:
That sort of investment is 'parking' money. It is parked somewhere to either act a conduit moving from owner to owner (which can be laundering). Or just to park it and not lose much value until better opportunities arise as a good hedge against inflation. Renting can be a pain as anyone who has got a bad tenant will tell you. That the Chinese are/were speculating in this way is not too big of a stretch (but is an assumption) as they have whole cities are that are basically big empty apartment cities.
That’s just a silly premise. Vacancies are because landlords are seeking long term tenants, and the discounting is done in negotiations behind the scene.
Just because you don’t want Ed’s Thrift shop in your retail space on a cut rate month to month lease, doesn’t mean you fight desperately want a tenant. A multimillion dollar investment yielding negative cash flow over years is a disaster, be ye investor or launderer.
> 3. If the asset being purchased is a home, incentives between buyer and seller are aligned and prices are higher than the non-laundering market would support (esp if there's another launderer who's interested).
This is true but misleading. The money launderer doesn't want to throw away money. They want to launder money as cheaply as possible. That said, they are willing to pay far more than an asset is "worth" if they expect to be able to resell it for a price equal to or even slightly lower than they paid. The loss is the "price" of laundering. This supports higher prices for real estate, but not arbitrarily high prices, because if the launderer pays too much, they will simply have to resell for less, leaving money on the table that they could have kept.
That’s true but not super relevant. The important point is that prices become dissociated from local incomes if a laundering buyer agrees to a price that’s much higher than what a local would pay.
There are several reasons local communities may wish to restrict home purchases by outsiders. Xenophobia is one, but likely not a large contributor. Concerns over unsustainable realty prices may be another, or simply wishing to preserve a locked down community.
I'm making no judgment calls here, just pointing out that an easy, pat answer is not sufficient.
Investors bring in fresh money. The real "mystery" is why people aren't building more housing to take advantage of the demand. When you are starting a company the hardest problem by far is finding people who buy your products. In real estate it's exactly the opposite.
One way to think about this is that cash is plentiful in China, but a strong social/legal system that ensures long-term, low-risk investments is "plentiful" in Canada or the US.
In this sense, these foreign investors are taking advantage of a functional social/legal system that lowers risk, but in the cases documented nearby, they aren't giving back to ensure the longevity of the system. Indeed, their remotely-executed purchases increase its instability.
The term "xenophobia" is also a useful tool that is used by the government, the media, and individuals on social media to suppress the free discussion of very important matters.
The Government of Canada has the ability to published (anonymized) data (real estate sales correlated to the buyers historic income taxes/wealth, etc) that could eliminate most of the opaqueness of what is really going on in Canadian housing markets, but they do not, despite vowing to "get to the bottom of" the situation.
The media could point out that the Canadian Government has this ability but does not do it, but they do not, despite claiming to be trustworthy, unbiased reporters of the affairs that are important to the public.
As is often the case, what is actually true is unjustly (and "democratically") hidden from view of the public, coverage is provided (intentionally or not) by the media, and the end result is that the populace is split into various camps who then fight among themselves. Is this situation the actual "will of the people", as we are endlessly told is what Democracy (and nothing else) delivers? I believe there is a fairly substantial amount of evidence that it is not what people want, although that sort of topic seems a bit socially taboo, so all one can do is speculate.
The UK has Unexplained Wealth Orders, which can be used if a person cannot explain where they got the funds to purchase property. It's been in the news a few times but I'm not sure how effective it is:
Quote:
3)An unexplained wealth order is an order requiring the respondent to provide a statement—
(a)setting out the nature and extent of the respondent’s interest in the property in respect of which the order is made,
(b)explaining how the respondent obtained the property (including, in particular, how any costs incurred in obtaining it were met),
(c)where the property is held by the trustees of a settlement, setting out such details of the settlement as may be specified in the order, and
(d)setting out such other information in connection with the property as may be so specified.
It's like how the market cap of a cryptoasset can be massive and yet a small amount of wash trading can pump the price because the market order books are thin
Has been said by many in Australia that's it's easier to buy a house than get a library card.
The biggest residential purchase was splashed across the front page of the biggest newspaper as some great event yet it took them years to determine it was illegal and that was from a falling out between the owner and government.
If a $30 million luxury house in Sydney with national news coverage can't be exposed as being illegally bought, what fucking hope does any average property have? They basically catch no one for this stuff and if they do it's always due to some other crime instead.
UK/Canada/Australia/NZ are some of the biggest real estate money laundering destinations on Earth and all of their governments know it.
That was certainly happening. Ultimately the problem was non-local income was driving up the housing market. But laundered money (from Canadians or non-Canadians) was almost certainly the primary driver of inflated housing prices.
This was linked further down... a student owns 99% of a $31mm property. A Chinese business person owns the other 1%. That sounds like trying to get around KYC / AML requirements and obfuscating things to me...
> The goal of a money launderer is to launder as much as possible
When does that goal compete with the equally efficient method of just lighting the cash on fire?
The goal is also a place to store that laundered cash. When the time comes to take it out of storages, it's only worth 10 cents on the dollar, the whole the higher the price the better thesis falls apart.
Laundering assumes liquidity when the money is clean, otherwise it’s not laundering.
Funnily 10c on the dollar might be worth doing if there are no other laundering methods available. It’s like investing - laundered money seeks the beat returns. And in the case of Vancouver the assets purchased with laundered money actually went up YOY. Seems like a good place to launder, no?
"...because foreign home ownership was "only" in the 5-10% range..."
Such a weird rationalization.
Even very non-economist me "knows" that small changes in supply (<1%) leads to big changes in price. Either up or down. More so when factoring demand.
Some things add friction to efficient price discovery, like rent control and landlords servicing debts. But the first order factor is supply and demand.
Except the reality is that local speculation is also wild and crazy. It's just easier to blame foreigners.
I've read stats that indicate that nearly 20% of home owners in the Toronto area own at least one additional "investment" property. This rings true with my own experience, as the cult of home ownership is ridiculously strong in Canada, and many have been betting on and fueling rampant speculation for the past decade -- buying boxes in the sky for hundreds of thousands of dollars under the assumption that real estate just keeps going up.
But the anecdotal stories about the occasional foreign buyer is somehow much more satisfying and comforting than the thought that Canadians are also responsible.
I agree w/ you. Anecdotally but the most common argument I heard was "5-10% can't drive the huge price increases we're seeing". My counter was always that comps drive market pricing. It doesn't take very many sales well over asking to inflate a market, esp when the supply of capital is large, not local, and being laundered.
For Vancouver BC Canada, yes. The RCMP did up such a report in 2018.
It was something around $6bn/year for amount. Majority seemed to be tax evasion (eg : US billionaire X wants to hide capital X, so hires company Y in China to purchase land in Canada for $X, transferring through hidden channels to reduce tracking).
Apparently that's a pretty common model. Doing the same through Russia was also common.
These transactions are illegal in their home countries. (it was a lot of countries). No real "legal" problem in Canada as yet.
Legally problematic is because monetary sources are not checked (still), drug dealers can buy and sell property and all of a sudden their money is now "clean" and usable for legal purposes. As in yes, money laundering.
I never saw the report itself, just the interviews on multiple news agencies interviewing the RCMP representative.
They did NOT do explicit numbers other than totals in the public, just the example above is my memory of one of their examples.
This is how my sale went a few years ago in Toronto. One contractor, one couple with their realtor, and one realtor on the phone representing a remote client.
Everyone put in a bid. The realtor representing the remote client gave an offer 200k over asking. Never saw the buyer. Drove by months later and still no one living there. Neighbor told me a young Chinese couple showed up a few weeks after purchase, got out and looked at the property for a minute and drove off, didn't even go in. Property was still empty 2 years later.
Extended family remember sells house in Toronto (Bloor West Village). House is at least 100 years old and in rough shape. Gets an offer for 1.4 million (about 150k over asking) as is from a 20 something year old Chinese University of Toronto Student. The student tells family member not to be alarmed if the name on the contract is different from hers. House was rented out a few months after sale.
I have dealt with many Chinese factories in a previous life. Many were State factories and everyone from the sales person to the accountant to the factory floor supervisor is on the take. They skim and over time accumulate some serious money. This money leaves the country in capital outflows into the real estate market in Canada. The thinking is I don't care if it makes any money as an investment, I just got to get it out of China so the CCP can't take it away. Banks are no good, so lets just put it in real estate. Who cares if we lose 200k on property, better than losing it all to the Chinese Gov.
Another interesting story, real estate agent representing me tells me this story. He's on the phone with an agent representing a Chinese client who wants to buy a Condo in a new development in downtown Toronto. Realtor says client will take one. My Realtor asks him what kind of unit? Chinese buyers tells him not a unit but the whole 8th floor.
The average price of a house in Toronto will be in the millions in the next decade. Anyone earning less than 200-300 k a year will not be able to afford one, unless they have a windfall inheritance. Now with a possible Hong Kong exodus, there is no limit to the insanity. Young Canadians in major cities are screwed. Renters for life.
I grew up in an extremely remote part of Southern California and for years there were rumors of "land banking" investments being made by Asian investors. This was back in the 90's, so it was extremely difficult to verify these types of rumors.
Fast forward 15 years and an article pops in their local paper (I had long since moved away), and it turns out it was true!
From the Daily Press [1]:
> Lured by the prospect of massive transportation projects that could skyrocket land values, the Victor Valley has become a jewel for foreign and domestic investors looking to make a fortune in a practice called land banking. In land banking, investors buy raw land and hold onto it until the value goes up because of inflation or development.
For those who aren't familiar with the area, it's a remote and extremely low-income, low-education area of California. Anyone making investments in property there is looking for them to pay off a generation or two from now.
I wouldn't call it remote. I know people who live in Victorville and commute over Cajon Pass to Riverside. One hour each way isn't an unthinkable commute in Southern California, and it lets them afford a fairly nice place compared to what they could get in Riverside. I suspect they're not that unusual.
In fact I thought of "land banking" there myself a decade or two ago, because I could see that the commute over Cajon would become thinkable.
Easy fix- have very high property taxes, but they are deductible or waived for locally earned income. If it costs the owner 25% a year to hold the property, won't be nearly as attractive.
Unfortunately at this point a large amount of the Canadian and Australian real estate markets (and thus national wealth) are driven by Chinese money, so there's little chance of this happening.
I like the idea of a vacancy tax that is proportional to the value of the property so that any year-over-year gains in equity are eaten up by such tax. I think turning a vacant property into a liability instead of an asset would do a lot to keep housing accessible.
I would agree, with one caveat: limit taxes to land only. And then set the taxes so high that the purchase price of land is as close to $0 as possible, which means that there will be both small positive and small negative valuations for the land (because of the tax burden).
This is equivalent to taxing away the land rents: the unearned appreciation of value in property that comes from those around you, rather than what you build.
In this sort of system, other taxes can decrease quite a bit as well.
Those is why China started limiting the outflow of capital several years ago.
It has an immediate effect in LA, where a number of buildings under construction were financed by Chinese investors. In one case, the developer itself couldn't get it's own money out, and now they have a giant unfinished hulk right across from Staples Center.
> Those is why China started limiting the outflow of capital several years ago.
On paper, but like all things in China enforcement is a completely different thing. There are many ways around it and it's much easier when Canada's AML and KYC requirements would make a 1980s' Caribbean Banker blush.
Even a municipal vacancy tax is just a new cost of doing business. Further, the Canadian Liberals and BoC have both signalled that they intend to devalue the CAD and prop up real-estate. You'd be a fool as a Chinese foreign investor to not dump money into Canadian real estate. It's de-facto government-backed at this point, comes with a Canadian passport, and the Canadian Liberals will never move a finger against you or China.
Question for people more knowledgeable than me? Why doesn't this result in dirt-cheap rents across Canada?
Sure a bunch of hot-money can easily bid up asset prices. But at the same time it should also drive down yields on those assets. Like you say, the vast majority of these houses aren't being lived in. Nor are the owners sensitive to returns. Why don't more of them put their dwellings up for rent, flooding the rental market and driving down prices?
The Chinese buyers are not concerned with making money on their properties. The properties primary use is to hold money. It's like the jar buried in the backyard full of gold for the Chinese.
Renters are not worth the hassle and earning an income renting a property might throw up some flags and other Income Tax headaches. What you get is a lot of properties just sitting empty going up in value because of the lack of inventory screwing potential Canadian buyers or renters. I don't know if I remember correctly but I read somewhere that there were Condo buildings in Vancouver that were almost dark at night because so few people actually lived in them. Complete neighborhoods were void of people because of the foreign ownership.
This is about parking money in an asset that would be hard for the CCP to get their hands on. If it were in a foreign bank account as currency, the CCP would have easy access to it. The CCP probably doesn't even know there are 1oo's of billions over the last 2 decades sitting in Canadian housing.
Vancouver where I live had fairly cheap rent compared to ownership for awhile, maybe back in 2010's. Mortgage + maintenance fee back then for a condo could be like $2800/month but would rent for as low as ~$1000-$1500. It is still like this but the spread is a bit less because of cheap money, and weaker condo prices cause of covid. You can get 1.79% 5 year fixed on a 25 year amortized mortgage rn. Our housing market bubble is humming through covid.
We have very low to no property taxes. All of our taxes are based on income. So a condo could have annual property taxes of like $1800-$2000... So what is the point of renting it out if it is increasing in value 10% a year and you are going to use it maybe 2 months a year. The west side of Vancouver were all the mansions are, and had a the greatest new concentration of rich foreign buyers actually paid the lowest taxes in the province.
We also have very big immigration influx in Canada, foreign student population and a 10 year visa program with China. These all started shooting up rents. But also caused what is known as satellite families which drop of their kids and caretaker, use the public schools, health care etc but make all their money back in their country of origin not claiming income tax here. We had University students with their names on $30million houses. House wife seemed to be the most lucrative job going in real estate.
We got a new provincial government a few years ago who brought in the "speculation tax". Basically if you don't pay income tax here but own a house you have to pay a tax of 2% of the properties value. This is compounded on top of an empty homes tax the city put in place of 1% if it is not rented out. There was also some new laws/procedures put in place with data sharing across province/city/real estate board that is helping clearing up some malfeasance as well.
Relative to the cost of purchasing, it does. Buying in major cities in Canada simply does not make any financial sense unless you were counting on continued insane growth (fueled by local speculation as much or more than foreign).
Most people are unaware of the specific bet they are making, and buy just because Canada has a crazy cult of home ownership. From my own experience, it is far more intense than anywhere else. Paying anything other than a mortgage is widely seen as "throwing your money away", even with the above financial realities.
Unfortunately, although people are unaware of the nature of the bet they are making (unbridled speculation fueling price growth), they have been right for a long time, even through the housing collapse in the US. But the music's gotta stop at some point.
Though locals may talk about how young Canadians are "screwed" or that no one can afford a house anymore, the reality is that home ownership in Canada is higher than it has ever been in history. Young Canadians simply need to accept that, for now, owning a house shouldn't be their one goal in life: they should opt-out of the cult of home ownership, and just wait until buying makes financial sense (i.e. the bubble bursts or deflates).
There are unforeseen costs associated with being a foreign landlord open for local renters: taxes, fixes, complaints, language barriers (even before COVID).
The incentive to buy, hold and not rent, even with the speculation tax is higher than having their entire money confiscated by the CCP. The (discounted) money generated by rent does not justify the costs mentioned earlier either.
The answer is because a resource is at play that is finite: land.
If all the productive land in an urban area is effectively owned by foreign investors and left to sit, then renters bid up the remaining dwellings until they're priced out of the area. It also becomes more expensive to build in that area so the housing stock can't keep up with demand. It's terrible to let a vital commodity lay to waste.
Part of the reason why this doesn't happen is because the owner-investors are so wealthy that the 36-72k in rental income would mean nothing to them, and it isn't worth the hassle of being a landlord.
Parallels the dodgy wangling going on in Australia for the past decade or more.
"Pending" legislation to prevent money laundering via real estate has gathered dust in Canberra for well over a decade!
Lawyers, accountants and real estate agents are still exempted from reporting anything suspicious (including briefcases full of cash), providing an easy avenue for foreign buyers to launder funds through property.
On the surface we are a western nation, but lift the covers and we are enabling money laundering into real estate, to the tune of billions and billions every year.
Real estate agents report unprecedented numbers of overseas’ buyers of residential and commercial property in Melbourne and Sydney paying cash…
An estimated 70 per cent of Chinese buyers pay in cash
This is only a small part of the story. Seattle, San Francisco, and Los Angeles all have housing costs far in excess of local wages, and are pushing poorer people out of the cities. These other cities only have a tiny fraction of external money coming in, yet have very similar problems.
One common thing, however: building far less housing than the population is growing in the US.
This is the primary effect, decades of downzoning and decreasing housing production, without taking into account the needs of the population, just the desires of landlords and homeowners.
What this does is push up what percentile of wealth sets the market price. And if at the top of the wealth percentiles there are 10%-20% foreign money, then it seems like a tiny number of people are having a much bigger effect than they are.
Cutting out the purchases of those 10-20% wont have a huge effect on prices, but they make a great scapegoat, and let homeowners and landlords continue their profit-seeking schemes for a few more years.
Vancouver has both vacancy taxes and foreign purchase taxes. They do not solve the real problem, but are good window dressing and help a tiny fraction of the population.
It drives up the price of real estate, all of it. Which means that for those Canadians that bought - it's a huge segment of their net worth. And they vote.
Because not everyone's a loser in this case. Homeowners (typically boomers) benefit from this in the form of higher valuations for their home, which means $$$ when the decide to sell, or decide to take out a HELOC.
The real estate market in Canada needs better regulation too. My wife and were trying to buy a home in Toronto. We bid on a home that had no movement all summer and made an offer. Later that evening the selling agent found a mysterious second bidder, who they were also representing and that buyer kept overbidding us. Our agent wasn't privy to the bids we were making but I am sure that agent was sharing them with their buyer. They tried to get us to bid almost 20% over asking but but we walked away after 1%. I don't see how it is ethical for an agent to represent the buyer and seller in a home selling situation but I suppose if they ban it those agents will just get someone else in their company or some sort of friend to do the same thing.
IMHO there should be a public auction site where (binding) bid offers are placed (a la eBay). Or if during bidding things are kept secret, then after an offer has been accepted the process is made public to make sure there was no funny business.
Millennials are screwed twice: once by having the boomers scoop up all the cheap property decades ago, and then again by unrestricted globalism where foreign people with no stakes whatsoever in the local community use housing to park their money and hide it from the CCP.
This isn’t a particularly clever insight, yet many still don’t seem to get it and draw the right conclusions.
> The average price of a house in Toronto will be in the millions in the next decade. Anyone earning less than 200-300 k a year will not be able to afford one, unless they have a windfall inheritance. Now with a possible Hong Kong exodus, there is no limit to the insanity. Young Canadians in major cities are screwed. Renters for life.
Something I'm wondering: Why then are young Canadians overwhelmingly voting for a party that supports these sky high immigration quotas and lax policies around foreign ownership?
>everyone from the sales person to the accountant to the factory floor supervisor is on the take. They skim and over time accumulate some serious money.
Seems that Canada is also more generally known for money laundering internationally, to the point that there is a specific verb for it:
> Snow washing refers to hiding illegitimate financial transactions often for purposes of tax evasion in Canada.[1] The term is an amalgam of the words snow meaning purity as well as the cold Canadian climate and washing referring to money laundering. It is easy under Canadian law to set up a company, even for a fee as low as $200 (Canadian), while shielding the identities of the firm's real owners from the eyes of tax authorities.[2] The global elite, as well as criminals and foreigners avoiding economic sanctions, can set up shell companies to "make suspect transactions seem legitimate" under the cover of Canada's reputation for fiscal integrity.[1]
>> Properly laundered money should be extremely difficult to tell from legitimate business.
Fine point: The goal is not to make it indistinguishable from legitimate business. Rather it is to keep it distinguishable from illegitimate business long enough that police look elsewhere.
The money launderer isn't trying to hid as a legitimate profit-seeking business. The goal is to add so many layers that the burden of investigation dissuades prosecution. So they aren't going to setup false cash-based storefronts so as to mix the bad money with the good (ie the laundromat joke in Archer). Such concrete actions are too dangerous. What they will do is bounce money across as many jurisdictions as possible. There may be no legitimate reason for doing this but they aren't really trying to seem legitimate. They just want to look like a very difficult target so that the cops will go after easier prey. That burden increase is more effective and less dangerous than the lies required to hide.
Vancouver is an extra special case because of all the Chinese/HK money parked there. A planeful of middle-aged Asian gentlemen in suits would land in the morning, take a private bus tour around open properties, pay the asking, board the plane and leave. Developers were literally building high-rises to give foreign "investors" something valuable to buy. This all but priced every normal family the fuck out of the market. It was completely insanely bananas. Not "a little money laundering" by any measure.
Lovely city though, beautiful nature, excellent restaurants.
Developers were literally building high-rises to give foreign "investors" something valuable to buy.
...and yet with all of this development, the rental vacancy rate still hovers around 0...
...and it’s not like we have a huge number of empty homes because we have 2 layers of empty home taxes at this point and we’ve precisely quantified how many there are (~6000 private residences out of a total of ~900000 in the metro area) and there aren’t that many...
...and the population keeps exploding at 2%/year...
...and most of the residential land in the metro area is still restrictively zoned for only single family homes.
I don’t think that we need money-laundering to explain the crazy real estate market here. We just need plain-old NIMBYism, break-neck population growth, and historically-low interest rates.
People like having one factor to blame. It means they can avoid all the cognitive overhead of engaging with a complex reality. It means never having to evaluate if policies you support and goals you desire might be at odds.
When everything is the fault of those foreigners, a truly remarkable amount of cognitive work just doesn't have to happen.
In effect, you're saying that Vancouver has become the laundromat of converting illegitimate capital produced under a shadow banking system into real valuable assets.
This is bad for everyone else in our global economic system. It would be akin to someone in a game of monopoly accepting counterfeit money. The rest of the players have to play the game with actual monopoly rules while one player is allowed to make up whatever they want. Guess who's going to win that game?
Of course its a shadow banking system for a reason, because keeping everything hidden gives them a cheaters advantage. Revealing what happens there would be admitting to cheat and fraud.
China is seriously going full force with deception, passive aggression, claiming innocence, claiming moral high ground, while doing everything that is in the book of machiavellian/art-of-war tactics, and the rest of the world is doing nothing about it. (hardly surprising given their cultural mythologies and inclinations which differ vastly from for example a "liberty, justice, and freedom-for-all" mantra that is the foundation and aspiration of a different nation)
It's not only china that does this, and it's not only Vancouver that is the destination for this, it's just Vancouver is a popular destination for pacific rim countries for this AND has no superstar industry to speak of like London & NYC to help balance this.
In SF, NYC & London you can also partly blame their superstar industries and economic growth on the RE market, but NYC/London also has their empty Condo buildings too, and their equivalent of 'wealthy chinese' is 'wealthy russian'.
What’s bad about foreign capital influx? Someone has to plan these buildings, someone has to build them. It creates jobs in various sectors.
We should be glad that the Chinese view our countries as safe and want to invest into them.
The real problem is that our local governments are unable to adjust the supply to the demand. THAT drives up prices and nothing else.
/edit: You could even make a law that foreigners can only invest into new construction which would make it impossible to invest without value creation for the local economy.
Seems like an interesting strategy - because the only people that can buy those properties, are other rich people.
It's like with high culture and art; Lots of art is simply being passed around multi-millionaires and billionaires. Since there's such a limited pool of buyers, the price is essentially whatever the next buyer is willing to pay for it.
Same goes for buildings - If I decide to pay $5MM for a $1MM house, just to park my money in it, I better find some buyer whose willing to pay in the same price-range, or else it's gonna be a substantial loss. Driving up prices, and keeping them artificially high, is not sustainable - unless the area happens to see some major influx of people, and the demand starts to grow organically. Bonus points if it's a very difficult area to develop in, which limits new buildings / real-estate development.
But as for the reasons, who knows - could be:
- Tax evasion in their native country
- Ill-gotten gains they want to hide, or money laundering
- Alternative investments
Why is that all considered "money laundering" rather than investing? There was a forcing function on getting money out of HK prior to China taking over, but that seems more diversifying than "laundering".
Similarly, many Canadians own rental properties (often bought without viewing them) in Florida and Phoenix.
Planes full of these folks used to head to those regions for a few weeks or a month in winter months.
I'm sorry, but does that article offer ANY evidence at all for the impact of money laundering, except for the "just so" story in the middle? ("money launderers beat up prices, and the rest of the market just runs with it" - as if people were able or willing to pay arbitrary prices).
Have you ever lived in Vancouver? It’s a strange place. Everything is expensive and you see ultra rich people everywhere, but there is little in the way of local industry to explain all this wealth. Everyone who lives there will recognise this uneasy feeling of ‘Where did all the money come from?’ For ‘normal’ people it feels like there’s this richer strata of society that exists but there is no clear path into it. Almost like royalty.
This article may offer little evidence, but it rings very true for people who live there.
I’ve been to Vancouver a number of times and yes, it has the vibe you describe.
However, money laundering isn’t the only driver of that vibe. I just got the sense it was a lot of money from Hong Kong that flooded Vancouver. So no industry was needed to support the high housing prices, it was being supported from foreign money.
But again, that’s different than laundering money.
I have not been to Vancouver, but it sounds very attractive: next to the sea and the mountains, good health care, working democracy and civilization and so on.
It does not sound implausible that housing prices are soaring.
Also perhaps a lot of government regulation that make it difficult to build more housing.
And there are other sources of money besides "money laundering" - why assume of all sources, "money laundering" is the driving force?
Like lets say newly rich Chinese people appreciate the investment in Vancouver. Is that then "money laundering"? Do they just equate "foreign investors" with "money laundering"?
> Everything is expensive and you see ultra rich people everywhere, but there is little in the way of local industry to explain all this wealth.
Maybe the money comes from abroad, has this occurred to you?
> This article may offer little evidence, but it rings very true for people who live there.
It's a boogeyman used by politicians to have a set of "bad guys" to point to. The truth is most of those wealthy foreigners buying up Vancouver real estate are not money launderers, they're just wealthy foreigners.
Elsewhere. It can be surprising only when you look at it through an industrial, 20-century world view. Now, even middle class people are free to move and work wherever they like, so it's only natural that people who made a fortune would seek the most comfortable cities in first world countries and bring their wealth with them. Is there any specific reason to suspect that this wealth is laundered and not simply imported?
They offer an indirect source for the one explicit claim made in the article: 20% of the price increases in London due to laundering. It's not linked, and I wasn't able to find an article online, but the claim is credited to "Christoph Trautvetter of Netzwerk Steuergerechtigkeit"
Aside from that concrete claim, they offer a plausible explanation for why something that may make up a small proportion of sales could cause an outsized increase in prices. And they do draw comparisons to known cases in stock markets. So I think it's still an interesting article.
Yeah, the article just assumes that a) money laundering via real estate is happening, b) it is increasing prices and then c) is trying to explain the logic behind it. But the title is misleading because the never actually establishes a) and b) ... it just meanders around in c)
>Yeah, the article just assumes that a) money laundering via real estate is happening
Sort of like how people are walking into BC casinos with half a million dollars in $20 bills and authorities are being told not to ask questions? Yeah, we don't "know" there's money laundering, but reasonable people ask questions...
Yes, prices are set by the margin, so small changes in supply and demand can have outsized effects on prices.
But the article completely falls apart here:
> If you are money laundering... The objective is to move as much cash, as fast as possible. This often involves large assets, and the bigger the price – the better... Both the seller and the money laundering buyer want the highest acceptable price... Competition between interests align, and there’s minimal friction preventing prices from going higher.
This gets it completely opposite and wrong. It doesn't matter if you're laundering money or not -- you still want the best deal on an asset. You still want to sell eventually, and the lower your buying price, the more profit you'll make later. Everybody still wants to make a profit.
A launderer will always prefer to buy 2 properties at a market value of $1 million each, over buying one of those at an inflated $2 million. Always. The laws of supply and demand don't disappear just because you're laundering money.
The idea that "the objective is to move as much cash, as fast as possible" is totally made-up and totally ludicrous. The idea is to move the amount you have, in a reasonable timeframe, at the most profitable price.
The only reason money launderers can have an outsized effect on the real estate market is because they generate more demand. Period. But that demand is no different from legitimate buyers. Demand is demand. That's the entire story.
(Of course, if laws around LLC's and scrutiny around real estate deals were changed then that demand might dry up. But that doesn't have anything to do with the laws of economics.)
I think this is missing something. Lets say I have 200 dollars of illegal money. How much value does that actually have? I would say 0 because it is illegal. Now lets say I buy a widget that is worth 100 dollars for 200 dollars. Then I sell it for 100 dollars. I now have converted 200 dollars of worthless illegal money into 100 dollars of legal money.
This happens all of the time for EBT and food stamps. Buy a case of pepsi for 30 dollars and sell it back for 15 (sometimes to the same seller). 30 electronic dollars that can only be spent on a limited set of goods is converted to 15 dollars cash that can be spent on anything.
My point is that the definition of "value" may actually align. It's ok if they new owner sells at a monetary loss because they are still making a gain.
The real situation is this: you have $200 of illegal money. Now you have the choice between using that $200 to buy a widget that's worth $100, or a widget that's worth $200.
Obviously you'll buy the widget that's worth $200.
EBT/food stamps are a bad analogy because the missing $15 in your example goes to transaction costs -- a middleman needs to buy, market, sell.
In real estate, that simply corresponds to the real estate broker's fee -- 5% or 6%. Not 50%.
The point remains: it doesn't matter if you're laundering or not, you never want to lose money you don't have to. Just because it was illegal in the first place doesn't make you magically charitable. Everyone always wants the best bang for their buck. Period.
> Now lets say I buy a widget that is worth 100 dollars for 200 dollars. Then I sell it for 100 dollars. I now have converted 200 dollars of worthless illegal money into 100 dollars of legal money.
You washed the dirty $200 for clean $100. However, the seller of that widget has made $100 additional profit; to the seller, $200 is clean.
Not sure I agree, launderers don't worry about price, they need to move funds and do so on a fairly reasonable timeline. Losing a bit of money is part of the cost of doing business, as long as it's lower then taxes, its still a good deal. Also hyping up a neighborhood you have flippable assets in, lends to wanting to overpay to drive pricing up. Your assumption that fraud follows normal logic is flawed. Read a few federal cases about laundering and you'll see, many of them ain't so bright. And sometimes money needs to be cleaned on a timeline, so overpaying is again, just another cost. Dangerous people like to be paid on time too, so you flip what you can in the time you have.
Source: I know someone who, along with their family, was prosecuted for it on a very large scale.
This is partly true, partly wrong.
Each house bought for laundering money will be taken of the market for foreseeable future reducing supply.
Also house prices are very sticky, those (non-laundering people) who bought at the inflated price will likely not want to sell for lower, creating a situation where they might be stuck with their house in case of a temporary market crash, leading to further supply constrained.
The low interest rate environment and the levarage works both ways :)
But what you're describing is normal supply and demand in any housing market, laundering or not. If a family moves in from out of town, they take the house off the market for the foreseeable future as well.
My point is that laundering demand is no different from regular demand, economically -- demand is demand, period. Laundering doesn't push prices up more than they'd get pushed up if it were actual families coming to down. It merely pushes them up the exact same amount.
2 properties at 1 million will probably require more time and effort though, right? Like they may be better off buying 10 200k houses, but the mob lawyer has more important things to do
Quite frankly, you've missed the mark on a number of points. First is that dirty money is effectively worthless until it's cleaned, and launderers recognize that it will take some percentage to clean the money. In other words, they're willing to take a loss on an asset, as that's their fee for getting clean cash.
> The only reason money launderers can have an outsized effect on the real estate market is because they generate more demand. Period. But that demand is no different from legitimate buyers. Demand is demand. That's the entire story.
You're not seeing the full story, and it's a point that's touched on in the article. These transactions don't happen in a vacuum, and the market doesn't know that the buyer was legit or a launderer. The transaction sets a comp, which then gets used by everyone to set their prices. Enough transactions from launderers, and you can effectively reset what the market value for a property is. There's also impact on supply as many who are deciding on when might be a good time to sell now see the market 10% higher than expected. Suddenly you can get an increase in supply, higher market values, and transactions that make it more favorable for launderers.
>A launderer will always prefer to buy 2 properties at a market value of $1 million each, over buying one of those at an inflated $2 million. Always. The laws of supply and demand don't disappear just because you're laundering money.
A launderer prefers transactions that are least likely to generate attention from the authorities. Depending on the legal legwork, the "suspiciousness" of a given transaction, and other factors it's tough to say what they'd prefer.
> In other words, they're willing to take a loss on an asset, as that's their fee for getting clean cash.
But like everyone else, even if there's a loss, they want to minimize it. They're not seeking a loss, so it doesn't matter. Nobody gives up money they don't have to -- that's the entire point I'm making. I'm not missing the mark, it's the article that's missing the mark.
> Suddenly you can get an increase in supply, higher market values...
That's the demand I referred to originally. Demand is demand. You're just describing demand. That's the full story.
> A launderer prefers transactions that are least likely to generate attention from the authorities.
Once the provenance has been hidden through layers of LLC's, they still have plenty of options. They don't need to give up half their money, which is my point, so they won't. So it's very easy to say what they'd prefer -- they prefer to keep as much of their money as possible.
The article, and you, seem to be arguing that money launderers have no problem throwing away money for no reason, as if money doesn't matter and prices can be driven up arbitrarily without limit. My point is that this is false: money launderers seek to keep as much of their money as they can while still laundering it effectively. By the time they've made it to the stage of negotiating over a price of purchase, they function economically as a buyer like any other.
Is nothing like "desire to take the greatest loss on an asset."
> A launderer prefers transactions that are least likely to generate attention from the authorities.
Seems opposed to a desire to pay far too much for a thing.
The desire for people exfiltrating money from their home countries to buy real estate is because they are buying something that will never crash to nothing. Like you said, they don't really care too much if it's overvalued - the one thing that overvalued property always is, by definition, is widely available right now.
A nice side benefit is that you can park your kids in it, now, with the excuse of going to university, while you either continue to embezzle money and stay as quiet as possible to avoid discovery or arrest, or play revolution push-your-luck as a courtier to a dictator.
One way to look at this is that money launderers are happy to pay a higher price because the house provides more value to them that it does to other buyers: it is both a real estate asset and a tool to launder their money. It's sort of like putting an offer down on a house with a pool when you can't swim. You rationally won't pay as much as the Olympic swimmer also bidding on the house because they get more value from it than you do.
The first-order obvious rational solution is to "learn to swim". If you're going to buy a house, figure out a way to also launder some money with the purchase. That way you're competing on a level playing field with other money launderers.
The second-order observation is that there is a business opportunity here. Shortly, I expect to see a Y-combinator funded startup developing an AI-driven mobile app that connects BC home buyers with criminals looking to launder their illicit gains. The market becomes more efficient and everyone wins.
Readit News
The main question people asked about the appreciation was: "is appreciation really being driven up by foreign buyers".
Many came to the answer "no", because foreign home ownership was "only" in the 5-10% range depending on the neighbourhood.
This article lays out the case why foreign ownership % isn't the right thing to be looking at:
1. The goal of a money launderer is to launder as much as possible
2. The goal of a home seller is to sell for as much as possible
3. If the asset being purchased is a home, incentives between buyer and seller are aligned and prices are higher than the non-laundering market would support (esp if there's another launderer who's interested).
4. Since the market for home prices is based on comps, a few launderers can raise market prices substantially
5. Lather, rinse, repeat
The foreigner question was the wrong one to ask, though certainly a large part of the market was driven by foreign investment. The right question to ask -- and the problem to guard against -- was: "what's the impact of laundered money on the market".
BC added the foreign buyer's tax of 15% in 2016[1]. But beneficial ownership laws come into effect on November 30 of this year[2]. The former created a slight disincentive for foreigners laundering $$ to buy. But turns out what was really needed to slow the tide of illegal money flowing into housing was more transparency and disclosure rules.
[1] - https://financialpost.com/personal-finance/mortgages-real-es...
[2] - https://www.mondaq.com/canada/real-estate/988830/bc-real-est...
Louis Rossmann has a semi-recent YT video exploring one hypothesis: landlords have mortgages that contain clauses in then which specify that if rents have to be a certain amount, and if they drop too much then that means the property value must have dropped.
* https://www.youtube.com/watch?v=NdfmMB1E_qk
And if the property value has dropped, perhaps bringing the mortgage closer to being underwater, then the bank may want the landowner to put more equity in it so that adds to the bank's cushion.
And landowners don't want to put more of their own money into a leveraged investment, so they'd rather just deal with the carrying costs rather than trigger an 'equity event'.
The hypothesis was originally put forward in a Reddit comment:
* https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...
Just because you don’t want Ed’s Thrift shop in your retail space on a cut rate month to month lease, doesn’t mean you fight desperately want a tenant. A multimillion dollar investment yielding negative cash flow over years is a disaster, be ye investor or launderer.
This is true but misleading. The money launderer doesn't want to throw away money. They want to launder money as cheaply as possible. That said, they are willing to pay far more than an asset is "worth" if they expect to be able to resell it for a price equal to or even slightly lower than they paid. The loss is the "price" of laundering. This supports higher prices for real estate, but not arbitrarily high prices, because if the launderer pays too much, they will simply have to resell for less, leaving money on the table that they could have kept.
I'm making no judgment calls here, just pointing out that an easy, pat answer is not sufficient.
In this sense, these foreign investors are taking advantage of a functional social/legal system that lowers risk, but in the cases documented nearby, they aren't giving back to ensure the longevity of the system. Indeed, their remotely-executed purchases increase its instability.
The Government of Canada has the ability to published (anonymized) data (real estate sales correlated to the buyers historic income taxes/wealth, etc) that could eliminate most of the opaqueness of what is really going on in Canadian housing markets, but they do not, despite vowing to "get to the bottom of" the situation.
The media could point out that the Canadian Government has this ability but does not do it, but they do not, despite claiming to be trustworthy, unbiased reporters of the affairs that are important to the public.
As is often the case, what is actually true is unjustly (and "democratically") hidden from view of the public, coverage is provided (intentionally or not) by the media, and the end result is that the populace is split into various camps who then fight among themselves. Is this situation the actual "will of the people", as we are endlessly told is what Democracy (and nothing else) delivers? I believe there is a fairly substantial amount of evidence that it is not what people want, although that sort of topic seems a bit socially taboo, so all one can do is speculate.
Quote:
3)An unexplained wealth order is an order requiring the respondent to provide a statement—
(a)setting out the nature and extent of the respondent’s interest in the property in respect of which the order is made,
(b)explaining how the respondent obtained the property (including, in particular, how any costs incurred in obtaining it were met),
(c)where the property is held by the trustees of a settlement, setting out such details of the settlement as may be specified in the order, and
(d)setting out such other information in connection with the property as may be so specified.
https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/...
How many foreigners are able to obfuscate "true" ownership is also a huge question.
For CA$200 you can set up your own Canada-resident corporation with obfuscated directorships:
* https://en.wikipedia.org/wiki/Snow_washing
The biggest residential purchase was splashed across the front page of the biggest newspaper as some great event yet it took them years to determine it was illegal and that was from a falling out between the owner and government.
If a $30 million luxury house in Sydney with national news coverage can't be exposed as being illegally bought, what fucking hope does any average property have? They basically catch no one for this stuff and if they do it's always due to some other crime instead.
UK/Canada/Australia/NZ are some of the biggest real estate money laundering destinations on Earth and all of their governments know it.
This was linked further down... a student owns 99% of a $31mm property. A Chinese business person owns the other 1%. That sounds like trying to get around KYC / AML requirements and obfuscating things to me...
When does that goal compete with the equally efficient method of just lighting the cash on fire?
The goal is also a place to store that laundered cash. When the time comes to take it out of storages, it's only worth 10 cents on the dollar, the whole the higher the price the better thesis falls apart.
Funnily 10c on the dollar might be worth doing if there are no other laundering methods available. It’s like investing - laundered money seeks the beat returns. And in the case of Vancouver the assets purchased with laundered money actually went up YOY. Seems like a good place to launder, no?
Such a weird rationalization.
Even very non-economist me "knows" that small changes in supply (<1%) leads to big changes in price. Either up or down. More so when factoring demand.
Some things add friction to efficient price discovery, like rent control and landlords servicing debts. But the first order factor is supply and demand.
Right?
I've read stats that indicate that nearly 20% of home owners in the Toronto area own at least one additional "investment" property. This rings true with my own experience, as the cult of home ownership is ridiculously strong in Canada, and many have been betting on and fueling rampant speculation for the past decade -- buying boxes in the sky for hundreds of thousands of dollars under the assumption that real estate just keeps going up.
But the anecdotal stories about the occasional foreign buyer is somehow much more satisfying and comforting than the thought that Canadians are also responsible.
I never saw the report itself, just the interviews on multiple news agencies interviewing the RCMP representative. They did NOT do explicit numbers other than totals in the public, just the example above is my memory of one of their examples.
Deleted Comment
Everyone put in a bid. The realtor representing the remote client gave an offer 200k over asking. Never saw the buyer. Drove by months later and still no one living there. Neighbor told me a young Chinese couple showed up a few weeks after purchase, got out and looked at the property for a minute and drove off, didn't even go in. Property was still empty 2 years later.
Extended family remember sells house in Toronto (Bloor West Village). House is at least 100 years old and in rough shape. Gets an offer for 1.4 million (about 150k over asking) as is from a 20 something year old Chinese University of Toronto Student. The student tells family member not to be alarmed if the name on the contract is different from hers. House was rented out a few months after sale.
I have dealt with many Chinese factories in a previous life. Many were State factories and everyone from the sales person to the accountant to the factory floor supervisor is on the take. They skim and over time accumulate some serious money. This money leaves the country in capital outflows into the real estate market in Canada. The thinking is I don't care if it makes any money as an investment, I just got to get it out of China so the CCP can't take it away. Banks are no good, so lets just put it in real estate. Who cares if we lose 200k on property, better than losing it all to the Chinese Gov.
Another interesting story, real estate agent representing me tells me this story. He's on the phone with an agent representing a Chinese client who wants to buy a Condo in a new development in downtown Toronto. Realtor says client will take one. My Realtor asks him what kind of unit? Chinese buyers tells him not a unit but the whole 8th floor.
The average price of a house in Toronto will be in the millions in the next decade. Anyone earning less than 200-300 k a year will not be able to afford one, unless they have a windfall inheritance. Now with a possible Hong Kong exodus, there is no limit to the insanity. Young Canadians in major cities are screwed. Renters for life.
Fast forward 15 years and an article pops in their local paper (I had long since moved away), and it turns out it was true!
From the Daily Press [1]:
> Lured by the prospect of massive transportation projects that could skyrocket land values, the Victor Valley has become a jewel for foreign and domestic investors looking to make a fortune in a practice called land banking. In land banking, investors buy raw land and hold onto it until the value goes up because of inflation or development.
For those who aren't familiar with the area, it's a remote and extremely low-income, low-education area of California. Anyone making investments in property there is looking for them to pay off a generation or two from now.
[1] https://www.vvdailypress.com/article/20121001/BUSINESS/31001...
In fact I thought of "land banking" there myself a decade or two ago, because I could see that the commute over Cajon would become thinkable.
Unfortunately at this point a large amount of the Canadian and Australian real estate markets (and thus national wealth) are driven by Chinese money, so there's little chance of this happening.
This is equivalent to taxing away the land rents: the unearned appreciation of value in property that comes from those around you, rather than what you build.
In this sort of system, other taxes can decrease quite a bit as well.
* https://www2.gov.bc.ca/gov/content/taxes/speculation-vacancy...
If there is no registered resident for a domicile then the owner gets charged. Not sure how useful it's been:
* https://www.cbc.ca/news/canada/toronto/vacancy-tax-delayed-2...
Each house sold to a chinese person makes canada as a whole one house-worth richer.
It has an immediate effect in LA, where a number of buildings under construction were financed by Chinese investors. In one case, the developer itself couldn't get it's own money out, and now they have a giant unfinished hulk right across from Staples Center.
On paper, but like all things in China enforcement is a completely different thing. There are many ways around it and it's much easier when Canada's AML and KYC requirements would make a 1980s' Caribbean Banker blush.
Even a municipal vacancy tax is just a new cost of doing business. Further, the Canadian Liberals and BoC have both signalled that they intend to devalue the CAD and prop up real-estate. You'd be a fool as a Chinese foreign investor to not dump money into Canadian real estate. It's de-facto government-backed at this point, comes with a Canadian passport, and the Canadian Liberals will never move a finger against you or China.
Sure a bunch of hot-money can easily bid up asset prices. But at the same time it should also drive down yields on those assets. Like you say, the vast majority of these houses aren't being lived in. Nor are the owners sensitive to returns. Why don't more of them put their dwellings up for rent, flooding the rental market and driving down prices?
Renters are not worth the hassle and earning an income renting a property might throw up some flags and other Income Tax headaches. What you get is a lot of properties just sitting empty going up in value because of the lack of inventory screwing potential Canadian buyers or renters. I don't know if I remember correctly but I read somewhere that there were Condo buildings in Vancouver that were almost dark at night because so few people actually lived in them. Complete neighborhoods were void of people because of the foreign ownership.
This is about parking money in an asset that would be hard for the CCP to get their hands on. If it were in a foreign bank account as currency, the CCP would have easy access to it. The CCP probably doesn't even know there are 1oo's of billions over the last 2 decades sitting in Canadian housing.
We have very low to no property taxes. All of our taxes are based on income. So a condo could have annual property taxes of like $1800-$2000... So what is the point of renting it out if it is increasing in value 10% a year and you are going to use it maybe 2 months a year. The west side of Vancouver were all the mansions are, and had a the greatest new concentration of rich foreign buyers actually paid the lowest taxes in the province.
We also have very big immigration influx in Canada, foreign student population and a 10 year visa program with China. These all started shooting up rents. But also caused what is known as satellite families which drop of their kids and caretaker, use the public schools, health care etc but make all their money back in their country of origin not claiming income tax here. We had University students with their names on $30million houses. House wife seemed to be the most lucrative job going in real estate.
We got a new provincial government a few years ago who brought in the "speculation tax". Basically if you don't pay income tax here but own a house you have to pay a tax of 2% of the properties value. This is compounded on top of an empty homes tax the city put in place of 1% if it is not rented out. There was also some new laws/procedures put in place with data sharing across province/city/real estate board that is helping clearing up some malfeasance as well.
Most people are unaware of the specific bet they are making, and buy just because Canada has a crazy cult of home ownership. From my own experience, it is far more intense than anywhere else. Paying anything other than a mortgage is widely seen as "throwing your money away", even with the above financial realities.
Unfortunately, although people are unaware of the nature of the bet they are making (unbridled speculation fueling price growth), they have been right for a long time, even through the housing collapse in the US. But the music's gotta stop at some point.
Though locals may talk about how young Canadians are "screwed" or that no one can afford a house anymore, the reality is that home ownership in Canada is higher than it has ever been in history. Young Canadians simply need to accept that, for now, owning a house shouldn't be their one goal in life: they should opt-out of the cult of home ownership, and just wait until buying makes financial sense (i.e. the bubble bursts or deflates).
The incentive to buy, hold and not rent, even with the speculation tax is higher than having their entire money confiscated by the CCP. The (discounted) money generated by rent does not justify the costs mentioned earlier either.
If all the productive land in an urban area is effectively owned by foreign investors and left to sit, then renters bid up the remaining dwellings until they're priced out of the area. It also becomes more expensive to build in that area so the housing stock can't keep up with demand. It's terrible to let a vital commodity lay to waste.
"Pending" legislation to prevent money laundering via real estate has gathered dust in Canberra for well over a decade!
Lawyers, accountants and real estate agents are still exempted from reporting anything suspicious (including briefcases full of cash), providing an easy avenue for foreign buyers to launder funds through property.
https://www.macrobusiness.com.au/2017/10/us-expert-slams-aus...
On the surface we are a western nation, but lift the covers and we are enabling money laundering into real estate, to the tune of billions and billions every year.
Real estate agents report unprecedented numbers of overseas’ buyers of residential and commercial property in Melbourne and Sydney paying cash…
An estimated 70 per cent of Chinese buyers pay in cash
One common thing, however: building far less housing than the population is growing in the US.
This is the primary effect, decades of downzoning and decreasing housing production, without taking into account the needs of the population, just the desires of landlords and homeowners.
What this does is push up what percentile of wealth sets the market price. And if at the top of the wealth percentiles there are 10%-20% foreign money, then it seems like a tiny number of people are having a much bigger effect than they are.
Cutting out the purchases of those 10-20% wont have a huge effect on prices, but they make a great scapegoat, and let homeowners and landlords continue their profit-seeking schemes for a few more years.
Vancouver has both vacancy taxes and foreign purchase taxes. They do not solve the real problem, but are good window dressing and help a tiny fraction of the population.
IMHO more transparency would help.
This isn’t a particularly clever insight, yet many still don’t seem to get it and draw the right conclusions.
Something I'm wondering: Why then are young Canadians overwhelmingly voting for a party that supports these sky high immigration quotas and lax policies around foreign ownership?
How exactly does this part work?
> Snow washing refers to hiding illegitimate financial transactions often for purposes of tax evasion in Canada.[1] The term is an amalgam of the words snow meaning purity as well as the cold Canadian climate and washing referring to money laundering. It is easy under Canadian law to set up a company, even for a fee as low as $200 (Canadian), while shielding the identities of the firm's real owners from the eyes of tax authorities.[2] The global elite, as well as criminals and foreigners avoiding economic sanctions, can set up shell companies to "make suspect transactions seem legitimate" under the cover of Canada's reputation for fiscal integrity.[1]
* https://en.wikipedia.org/wiki/Snow_washing
Fine point: The goal is not to make it indistinguishable from legitimate business. Rather it is to keep it distinguishable from illegitimate business long enough that police look elsewhere.
The money launderer isn't trying to hid as a legitimate profit-seeking business. The goal is to add so many layers that the burden of investigation dissuades prosecution. So they aren't going to setup false cash-based storefronts so as to mix the bad money with the good (ie the laundromat joke in Archer). Such concrete actions are too dangerous. What they will do is bounce money across as many jurisdictions as possible. There may be no legitimate reason for doing this but they aren't really trying to seem legitimate. They just want to look like a very difficult target so that the cops will go after easier prey. That burden increase is more effective and less dangerous than the lies required to hide.
Lovely city though, beautiful nature, excellent restaurants.
...and yet with all of this development, the rental vacancy rate still hovers around 0...
...and it’s not like we have a huge number of empty homes because we have 2 layers of empty home taxes at this point and we’ve precisely quantified how many there are (~6000 private residences out of a total of ~900000 in the metro area) and there aren’t that many...
...and the population keeps exploding at 2%/year...
...and most of the residential land in the metro area is still restrictively zoned for only single family homes.
I don’t think that we need money-laundering to explain the crazy real estate market here. We just need plain-old NIMBYism, break-neck population growth, and historically-low interest rates.
When everything is the fault of those foreigners, a truly remarkable amount of cognitive work just doesn't have to happen.
This is bad for everyone else in our global economic system. It would be akin to someone in a game of monopoly accepting counterfeit money. The rest of the players have to play the game with actual monopoly rules while one player is allowed to make up whatever they want. Guess who's going to win that game?
Of course its a shadow banking system for a reason, because keeping everything hidden gives them a cheaters advantage. Revealing what happens there would be admitting to cheat and fraud.
China is seriously going full force with deception, passive aggression, claiming innocence, claiming moral high ground, while doing everything that is in the book of machiavellian/art-of-war tactics, and the rest of the world is doing nothing about it. (hardly surprising given their cultural mythologies and inclinations which differ vastly from for example a "liberty, justice, and freedom-for-all" mantra that is the foundation and aspiration of a different nation)
In SF, NYC & London you can also partly blame their superstar industries and economic growth on the RE market, but NYC/London also has their empty Condo buildings too, and their equivalent of 'wealthy chinese' is 'wealthy russian'.
Ex: https://www.nytimes.com/2017/07/21/upshot/when-the-empty-apa...
https://theweek.com/articles/736313/how-foreign-investors-la...
We should be glad that the Chinese view our countries as safe and want to invest into them.
The real problem is that our local governments are unable to adjust the supply to the demand. THAT drives up prices and nothing else.
/edit: You could even make a law that foreigners can only invest into new construction which would make it impossible to invest without value creation for the local economy.
It's like with high culture and art; Lots of art is simply being passed around multi-millionaires and billionaires. Since there's such a limited pool of buyers, the price is essentially whatever the next buyer is willing to pay for it.
Same goes for buildings - If I decide to pay $5MM for a $1MM house, just to park my money in it, I better find some buyer whose willing to pay in the same price-range, or else it's gonna be a substantial loss. Driving up prices, and keeping them artificially high, is not sustainable - unless the area happens to see some major influx of people, and the demand starts to grow organically. Bonus points if it's a very difficult area to develop in, which limits new buildings / real-estate development.
But as for the reasons, who knows - could be:
- Tax evasion in their native country - Ill-gotten gains they want to hide, or money laundering - Alternative investments
It is not like high priced art.
Similarly, many Canadians own rental properties (often bought without viewing them) in Florida and Phoenix. Planes full of these folks used to head to those regions for a few weeks or a month in winter months.
Your political issues do not free you from following tax law.
However, money laundering isn’t the only driver of that vibe. I just got the sense it was a lot of money from Hong Kong that flooded Vancouver. So no industry was needed to support the high housing prices, it was being supported from foreign money.
But again, that’s different than laundering money.
It does not sound implausible that housing prices are soaring.
Also perhaps a lot of government regulation that make it difficult to build more housing.
And there are other sources of money besides "money laundering" - why assume of all sources, "money laundering" is the driving force?
Like lets say newly rich Chinese people appreciate the investment in Vancouver. Is that then "money laundering"? Do they just equate "foreign investors" with "money laundering"?
https://www.sfgate.com/hawaii/article/Hawaii-real-estate-mar...
Maybe the money comes from abroad, has this occurred to you?
> This article may offer little evidence, but it rings very true for people who live there.
It's a boogeyman used by politicians to have a set of "bad guys" to point to. The truth is most of those wealthy foreigners buying up Vancouver real estate are not money launderers, they're just wealthy foreigners.
Elsewhere. It can be surprising only when you look at it through an industrial, 20-century world view. Now, even middle class people are free to move and work wherever they like, so it's only natural that people who made a fortune would seek the most comfortable cities in first world countries and bring their wealth with them. Is there any specific reason to suspect that this wealth is laundered and not simply imported?
Aside from that concrete claim, they offer a plausible explanation for why something that may make up a small proportion of sales could cause an outsized increase in prices. And they do draw comparisons to known cases in stock markets. So I think it's still an interesting article.
Sort of like how people are walking into BC casinos with half a million dollars in $20 bills and authorities are being told not to ask questions? Yeah, we don't "know" there's money laundering, but reasonable people ask questions...
https://www.msn.com/en-ca/news/canada/rcmp-detachment-head-w...
https://www.msn.com/en-ca/news/canada/virtually-no-controls-...
Yes, prices are set by the margin, so small changes in supply and demand can have outsized effects on prices.
But the article completely falls apart here:
> If you are money laundering... The objective is to move as much cash, as fast as possible. This often involves large assets, and the bigger the price – the better... Both the seller and the money laundering buyer want the highest acceptable price... Competition between interests align, and there’s minimal friction preventing prices from going higher.
This gets it completely opposite and wrong. It doesn't matter if you're laundering money or not -- you still want the best deal on an asset. You still want to sell eventually, and the lower your buying price, the more profit you'll make later. Everybody still wants to make a profit.
A launderer will always prefer to buy 2 properties at a market value of $1 million each, over buying one of those at an inflated $2 million. Always. The laws of supply and demand don't disappear just because you're laundering money.
The idea that "the objective is to move as much cash, as fast as possible" is totally made-up and totally ludicrous. The idea is to move the amount you have, in a reasonable timeframe, at the most profitable price.
The only reason money launderers can have an outsized effect on the real estate market is because they generate more demand. Period. But that demand is no different from legitimate buyers. Demand is demand. That's the entire story.
(Of course, if laws around LLC's and scrutiny around real estate deals were changed then that demand might dry up. But that doesn't have anything to do with the laws of economics.)
This happens all of the time for EBT and food stamps. Buy a case of pepsi for 30 dollars and sell it back for 15 (sometimes to the same seller). 30 electronic dollars that can only be spent on a limited set of goods is converted to 15 dollars cash that can be spent on anything.
My point is that the definition of "value" may actually align. It's ok if they new owner sells at a monetary loss because they are still making a gain.
The real situation is this: you have $200 of illegal money. Now you have the choice between using that $200 to buy a widget that's worth $100, or a widget that's worth $200.
Obviously you'll buy the widget that's worth $200.
EBT/food stamps are a bad analogy because the missing $15 in your example goes to transaction costs -- a middleman needs to buy, market, sell.
In real estate, that simply corresponds to the real estate broker's fee -- 5% or 6%. Not 50%.
The point remains: it doesn't matter if you're laundering or not, you never want to lose money you don't have to. Just because it was illegal in the first place doesn't make you magically charitable. Everyone always wants the best bang for their buck. Period.
You washed the dirty $200 for clean $100. However, the seller of that widget has made $100 additional profit; to the seller, $200 is clean.
Source: I know someone who, along with their family, was prosecuted for it on a very large scale.
Is the opposite of "launderers want to buy extremely overvalued things."
The low interest rate environment and the levarage works both ways :)
My point is that laundering demand is no different from regular demand, economically -- demand is demand, period. Laundering doesn't push prices up more than they'd get pushed up if it were actual families coming to down. It merely pushes them up the exact same amount.
> The only reason money launderers can have an outsized effect on the real estate market is because they generate more demand. Period. But that demand is no different from legitimate buyers. Demand is demand. That's the entire story.
You're not seeing the full story, and it's a point that's touched on in the article. These transactions don't happen in a vacuum, and the market doesn't know that the buyer was legit or a launderer. The transaction sets a comp, which then gets used by everyone to set their prices. Enough transactions from launderers, and you can effectively reset what the market value for a property is. There's also impact on supply as many who are deciding on when might be a good time to sell now see the market 10% higher than expected. Suddenly you can get an increase in supply, higher market values, and transactions that make it more favorable for launderers.
>A launderer will always prefer to buy 2 properties at a market value of $1 million each, over buying one of those at an inflated $2 million. Always. The laws of supply and demand don't disappear just because you're laundering money.
A launderer prefers transactions that are least likely to generate attention from the authorities. Depending on the legal legwork, the "suspiciousness" of a given transaction, and other factors it's tough to say what they'd prefer.
But like everyone else, even if there's a loss, they want to minimize it. They're not seeking a loss, so it doesn't matter. Nobody gives up money they don't have to -- that's the entire point I'm making. I'm not missing the mark, it's the article that's missing the mark.
> Suddenly you can get an increase in supply, higher market values...
That's the demand I referred to originally. Demand is demand. You're just describing demand. That's the full story.
> A launderer prefers transactions that are least likely to generate attention from the authorities.
Once the provenance has been hidden through layers of LLC's, they still have plenty of options. They don't need to give up half their money, which is my point, so they won't. So it's very easy to say what they'd prefer -- they prefer to keep as much of their money as possible.
The article, and you, seem to be arguing that money launderers have no problem throwing away money for no reason, as if money doesn't matter and prices can be driven up arbitrarily without limit. My point is that this is false: money launderers seek to keep as much of their money as they can while still laundering it effectively. By the time they've made it to the stage of negotiating over a price of purchase, they function economically as a buyer like any other.
Is nothing like "desire to take the greatest loss on an asset."
> A launderer prefers transactions that are least likely to generate attention from the authorities.
Seems opposed to a desire to pay far too much for a thing.
The desire for people exfiltrating money from their home countries to buy real estate is because they are buying something that will never crash to nothing. Like you said, they don't really care too much if it's overvalued - the one thing that overvalued property always is, by definition, is widely available right now.
A nice side benefit is that you can park your kids in it, now, with the excuse of going to university, while you either continue to embezzle money and stay as quiet as possible to avoid discovery or arrest, or play revolution push-your-luck as a courtier to a dictator.
The first-order obvious rational solution is to "learn to swim". If you're going to buy a house, figure out a way to also launder some money with the purchase. That way you're competing on a level playing field with other money launderers.
The second-order observation is that there is a business opportunity here. Shortly, I expect to see a Y-combinator funded startup developing an AI-driven mobile app that connects BC home buyers with criminals looking to launder their illicit gains. The market becomes more efficient and everyone wins.