A Little Money Laundering Can Have a Big Impact on Real Estate Prices (2019)(betterdwelling.com)
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A Little Money Laundering Can Have a Big Impact on Real Estate Prices (2019)
https://betterdwelling.com/how-a-little-money-laundering-can-have-a-big-impact-on-real-estate-prices/#_
306 comments
I don’t know real estate value is a lot bigger than global tax collection.
(Might be anecdotal or even have changed, but it is worth telling this story)
I once remember seeing a video where people described the steps needed to buy a property in Canada, obtain a mortgage, etc
Some banks allowed college students to get a mortgage (wink), and depending on the country, there were different KYC/AML regulations that had to be followed. Notably, China was not in the list of countries with additional KYC requirements (double wink)
Interpret this as you want.
I once remember seeing a video where people described the steps needed to buy a property in Canada, obtain a mortgage, etc
Some banks allowed college students to get a mortgage (wink), and depending on the country, there were different KYC/AML regulations that had to be followed. Notably, China was not in the list of countries with additional KYC requirements (double wink)
Interpret this as you want.
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).
Maybe it's time we admit that without a thorough reform, the idea of a "housing market" is completely fictional. Furthermore, at least with the way our current laws are written, we prefer having a large homeless population because it maintains the wealth of some group of people.
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.
Lovely city though, beautiful nature, excellent restaurants.
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 $$ to buy. But turns out what was really needed to slow the tide of illegal money flowing into housing was more transparency and disclosure rules.
[1] - https://financialpost.com/personal-finance/mortgages-real-es...
[2] - https://www.mondaq.com/canada/real-estate/988830/bc-real-est...
The main question people asked about the appreciation was: "is appreciation really being driven up by foreign buyers".
Many came to the answer "no", because foreign home ownership was "only" in the 5-10% range depending on the neighbourhood.
This article lays out the case why foreign ownership % isn't the right thing to be looking at:
1. The goal of a money launderer is to launder as much as possible
2. The goal of a home seller is to sell for as much as possible
3. If the asset being purchased is a home, incentives between buyer and seller are aligned and prices are higher than the non-laundering market would support (esp if there's another launderer who's interested).
4. Since the market for home prices is based on comps, a few launderers can raise market prices substantially
5. Lather, rinse, repeat
The foreigner question was the wrong one to ask, though certainly a large part of the market was driven by foreign investment. The right question to ask -- and the problem to guard against -- was: "what's the impact of laundered money on the market".
BC added the foreign buyer's tax of 15% in 2016[1]. But beneficial ownership laws come into effect on November 30 of this year[2]. The former created a slight disincentive for foreigners laundering $$ 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...
I'd be more interested in hearing about how people trying to move money out of governments and areas affects local real estate prices. I think Canada has more of a problem with wealthy Chinese trying to park their money outside of China than money laundering.
Wow this is something I was thinking about... then the money launderer turns around and sells the house they just bought “for quick close” and that sets another precedent in the market... and so the process repeats.
“All of a sudden, a money launderer shows up, and offers the owner 10% over ask for a “quick close.” You’re not too worried, your agent told you the place a few doors down is going to be on the market next week.
Unfortunately, the new place now uses the home owned by the money launder as a comp. Now the ask is 10% more than you were expecting, because the marginal buyer set the price down the street. Someone else bites, and buys it before it “goes too high.” Now the money launderer’s buy was just validated in the system.”
“All of a sudden, a money launderer shows up, and offers the owner 10% over ask for a “quick close.” You’re not too worried, your agent told you the place a few doors down is going to be on the market next week.
Unfortunately, the new place now uses the home owned by the money launder as a comp. Now the ask is 10% more than you were expecting, because the marginal buyer set the price down the street. Someone else bites, and buys it before it “goes too high.” Now the money launderer’s buy was just validated in the system.”
> The whole time, Boomers are stoking the coals on this fire, explaining this is “earned equity.” If you want your own, you need to work as hard as they did. Standing by as each irrational player enters the market is exhausting work. Boomers also had to save uphill for a down payment… both ways, in the snow or something.
Why the needless dig at Baby Boomers? I am not one (and normally as ready to enjoy a dig at them as the next guy), it just felt … off.
I can't blame someone who thinks his asset is worth something and who has made decisions based on that belief wanting to preserve that perception!
Why the needless dig at Baby Boomers? I am not one (and normally as ready to enjoy a dig at them as the next guy), it just felt … off.
I can't blame someone who thinks his asset is worth something and who has made decisions based on that belief wanting to preserve that perception!
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]
* https://en.wikipedia.org/wiki/Snow_washing
> 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
>> 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.
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.
Anecdotally, this happened in Denver when marijuana was legalized. Since the pot shops couldn’t store money with banks, many bought homes with cash. This led to a huge increase in cash buyers and a major spike in prices.
Why would a launderer buy an overpriced apt in Vancouver when they could by something sensibly priced elsewhere? Maybe its easier if there are agents that speak foreign languages, but I'd hate to own a $2mil 2br apartment as a safe haven for my money stash.
I am dumb enough to understand this. Can someone tell me how money laundering is done in real estate?
Doesn’t the buyer have to deposit the money in a bank for the title company to transfer it? Or May be in cash transactions they don’t care as long as the buyer is ok with it. So the money is transferred outside the cpu Rey or through shell accounts and the asset changes hands?
Doesn’t the buyer have to deposit the money in a bank for the title company to transfer it? Or May be in cash transactions they don’t care as long as the buyer is ok with it. So the money is transferred outside the cpu Rey or through shell accounts and the asset changes hands?
What a mass of conflicting and unsupported assertions.
This article isn't entirely true.
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.)
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 article doesn't pass the smell test, it is pure speculation. Their theory is basically that 1) quick successive buying and selling always drives real estate prices up and 2) money launderers always engage in such activity because they want cash. If 1) was true, the profit seeking motive would ensure that everyone would be doing it, not only money launderers. As for 2), I don't see a reason why criminals wouldn't also be long term investors. If a criminal successfully acquires real estate without raising flags, why risk immediately cashing it out? If they need cash for their criminal activity, why bother "cleaning" it?
A lot of modern "problem markets" ultimately show us (IMO) some of the limits of economics.
Economic theorising and/or "storytelling," as my econ professor termed it, can create plausible explanations. They're not strongly predictive though. In-context (say, a stock market) these theories can be somewhat dependable. "Predictive" is a strong term, but it's less wrong within highly similar contexts... that's how trading algorithms (non NN ones) work. They theorize within highly limited contexts.
In practice, these theories can be predictive enough to be successful trading strategies. In most cases, to be investably predictive a theory needs to be narrow. Certain asset classes, certain epochs, etc. Certain market conditions.
Even though they use similar concepts (supply, demand, price, and their marginal determinations), a theory about energy bonds cannot be applied to urban real estate. More academic theories go for generality. Broader theory, but not tradable predictive.
"Government and academics are still debating how much money is needed to distort a market. The truth is, not a whole lot is required to distort any asset market. This is a problem the stock market has been dealing with since the 1920s"
Sure. Not much is required, but that just makes it plausible. I'd wager some real estate markets are much harder to nudge than others. The highly sensitive marginal dynamics this article is theorising aren't a feature of all real estate markets at all times. They're almost certainly very linked to bubble/bull markets.
One rare example of broader theory being applied to actual trading is Soros. I think his concepts probably apply here. "Reflexivity," specifically.
Economic theorising and/or "storytelling," as my econ professor termed it, can create plausible explanations. They're not strongly predictive though. In-context (say, a stock market) these theories can be somewhat dependable. "Predictive" is a strong term, but it's less wrong within highly similar contexts... that's how trading algorithms (non NN ones) work. They theorize within highly limited contexts.
In practice, these theories can be predictive enough to be successful trading strategies. In most cases, to be investably predictive a theory needs to be narrow. Certain asset classes, certain epochs, etc. Certain market conditions.
Even though they use similar concepts (supply, demand, price, and their marginal determinations), a theory about energy bonds cannot be applied to urban real estate. More academic theories go for generality. Broader theory, but not tradable predictive.
"Government and academics are still debating how much money is needed to distort a market. The truth is, not a whole lot is required to distort any asset market. This is a problem the stock market has been dealing with since the 1920s"
Sure. Not much is required, but that just makes it plausible. I'd wager some real estate markets are much harder to nudge than others. The highly sensitive marginal dynamics this article is theorising aren't a feature of all real estate markets at all times. They're almost certainly very linked to bubble/bull markets.
One rare example of broader theory being applied to actual trading is Soros. I think his concepts probably apply here. "Reflexivity," specifically.
It makes much more sense when you imagine money launderer's money and your money having the same value in those dealers, but having different value for their holders.
You, a law-abiding, legitimate buyer, have paid all your taxes and committed no crimes on that money. You can do with it whatever you want to, so for you, it's one to one, a dollar for a dollar.
For a money launderer, however, the money is a hot potato. There's still a probability that it left a trail going back, so, he's not so free to use it as he pleases. It's basically very similar to counterfeit money in that regard: it's value to it's holder (who knows about the risks) is much less than a "real" dollar for dirty money dollar.
You, a law-abiding, legitimate buyer, have paid all your taxes and committed no crimes on that money. You can do with it whatever you want to, so for you, it's one to one, a dollar for a dollar.
For a money launderer, however, the money is a hot potato. There's still a probability that it left a trail going back, so, he's not so free to use it as he pleases. It's basically very similar to counterfeit money in that regard: it's value to it's holder (who knows about the risks) is much less than a "real" dollar for dirty money dollar.
I live in Bay Area 20 mins (by bike) from new Apple campus. A house next to ours has been empty for at least 5 years.
Once a year a lady from China shows up for not longer than week. It is never rented out, just sits empty...
Once a year a lady from China shows up for not longer than week. It is never rented out, just sits empty...
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.
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 Don't get how you would launder money with real Estate. Are the Chinese flying to Canada with suitcases full of cash and customs officials just let them in without any questions.
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.
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.
I find it strange that no one mentions London, property prices have soared in the past 20 years [1] with money laundering playing a key role [2][3][4][5].
Nowadays, football clubs appear to be a better option, as they allow easy laundering of billions instead of millions...
[1] https://www.bloomberg.com/graphics/property-prices/london/
[2] https://www.independent.co.uk/news/uk/home-news/london-prope...
[3] https://money.cnn.com/2015/07/28/news/london-real-estate-mon...
[4] https://www.theguardian.com/business/2019/may/20/uk-foreign-...
[5] https://www.newsweek.com/how-russians-launder-stolen-money-r...
Nowadays, football clubs appear to be a better option, as they allow easy laundering of billions instead of millions...
[1] https://www.bloomberg.com/graphics/property-prices/london/
[2] https://www.independent.co.uk/news/uk/home-news/london-prope...
[3] https://money.cnn.com/2015/07/28/news/london-real-estate-mon...
[4] https://www.theguardian.com/business/2019/may/20/uk-foreign-...
[5] https://www.newsweek.com/how-russians-launder-stolen-money-r...
FinTech Idea: Create a website whereby foreign capital can be sent to a local for the purchase of real estate. Maybe even allow said local to live inside of the dwelling provided they pay a small service fee of sorts.... /s
Perhaps though there is something here. If only there was a means of connecting these two groups, keeping in mind the additional parameters of those with the cash.
After all, nobody likes a haircut. I'm sure the 'big' boys are doing this - I'm really targeting the rich (not the RICH) supervisor that has enough to buy one to two properties. Might be after the fact - as others have pointed out, there are a number of additional controls in place.) Still...
Perhaps though there is something here. If only there was a means of connecting these two groups, keeping in mind the additional parameters of those with the cash.
After all, nobody likes a haircut. I'm sure the 'big' boys are doing this - I'm really targeting the rich (not the RICH) supervisor that has enough to buy one to two properties. Might be after the fact - as others have pointed out, there are a number of additional controls in place.) Still...
Last month I lost a bid on a house in a proximal suburb of major American tech hub to a cash offer 20% above asking.
This is happening everywhere.
This is happening everywhere.