9 ms·

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

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-estate/b-c-to-bring-in-additional-15-per-cent-real-estate-tax-on-foreign-buyers-in-vancouver-in-effort-to-rein-in-high-home-prices https://financialpost.com/personal-finance/mortgages-real-es... [2] - https://www.mondaq.com/canada/real-estate/988830/bc-real-estate-beneficial-ownership-disclosure-law-takes-effect-november-30-2020 https://www.mondaq.com/canada/real-estate/988830/bc-real-est...

itsoktocry 6y ago
>Many came to the answer "no", because foreign home ownership was in the 5-10% range depending on the neighbourhood. How many foreigners are able to obfuscate "true" ownership is also a huge question.
- Cancan82 6y ago
  https://torontosun.com/2016/05/12/311-million-vancouver-mansion-owned-by-student https://torontosun.com/2016/05/12/311-million-vancouver-mans... 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...
- kareemm 6y ago
  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.
- throw0101a 6y ago
  > 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 https://en.wikipedia.org/wiki/Snow_washing
  - novok 6y ago
    You also have to pay a yearly maintenance fee of ~$400/yr plus whatever your paying to a firm to maintain the corp FYI.
    - Red_Leaves_Flyy 6y ago
      For a $15,000,000,000 market annually that's pretty cheap for the participants...
- inquirerofsorts 6y ago
  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.
dathinab 6y ago
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.)
- sumtechguy 6y ago
  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.
- throw0101a 6y ago
  > (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. * https://www.youtube.com/watch?v=NdfmMB1E_qk 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_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...
  - ordinaryradical 6y ago
    I think these kinds of terms typically only apply to commercial real estate, or large, multi-tenant properties, which is what your reddit comment was addressing. But perhaps things are different in Canada?
deleted 6y ago
[deleted]
fartcannon 6y ago
The xenophobia is a useful tool to distract from the real problem: investors.
- cascom 6y ago
  I think I’m the Vancouver case foreign buyer is highly correlated with money launderer (capital control kind rather than illicit gains)
  - dahdum 6y ago
    Who has determined they are evading vs avoiding capital controls? Canada doesn't have the laws they are presumed to be breaking.
    - novok 6y ago
      They're avoiding the capital controls of China, because China has a history of executing it's wealthy on whim as the political weather changes.
- tomrod 6y ago
  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.
  - nine_k 6y ago
    > wishing to preserve a locked down community How do you differentiate it from xenophobia?
    - fnord123 6y ago
      I'm just confused. I thought they're the same thing.
55555 6y ago
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
- valuearb 6y ago
  Momentarily only.
dahdum 6y ago
Has it been established what percentage of foreign buyers are money laundering, and by whose laws?
- teunispeters 6y ago
  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.
three14 6y ago
> 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.
- kareemm 6y ago
  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.
  - three14 6y ago
    Prices are still associated with the prices that a local will pay. Money launderers don't want to lose dirty money any more than anyone else wants to lose clean money. They depend on there being a buyer at a price near what they paid. I suppose you could have a market that was so full of money launderers that they simply depend on flipping it to the next money launderer, but ordinarily, they depend on there being at least some proportion of locals who will pay the new, higher price, or they aren't guaranteed a buyer.
    - jbay808 6y ago
      A local who sold a home at an inflated price can often afford to buy another one at an inflated price. And it also attracts other generally wealthy investors looking to get in on a hot market.
jgalt212 6y ago
> 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.
- kareemm 6y ago
  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?
- winkeltripel 6y ago
  But the point of the article is that by paying too much for the property, the launderer drives the price of the market higher.
secondcoming 6y ago
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. https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/1/crossheading/unexplained-wealth-orders-england-and-wales-and-northern-ireland/enacted https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/...
specialist 6y ago
"...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. Right?
- kareemm 6y ago
  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.
  - lotsofpulp 6y ago
    It’s more accurate to say it’s the huge supply of capital looking for somewhere to be parked that is driving prices higher. Demand curve is number of houses available for sale, supply curve is people looking to purchase those homes. As the curves shift, if the price goes too high, then the lack of supply of people with sufficient money would cause prices to stall or come down. But it’s apparent that the supply of people with a lot of money (or credit) is a lot higher than the supply of houses. Maybe it’s even more accurate to say that the supply of inflation protected assets in stable societies is in low supply compared to the supply of capital trying to buy those assets.
- amscanne 6y ago
  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.

itsoktocry 6y ago

>Many came to the answer "no", because foreign home ownership was in the 5-10% range depending on the neighbourhood. How many foreigners are able to obfuscate "true" ownership is also a huge question.

Cancan82 6y ago
https://torontosun.com/2016/05/12/311-million-vancouver-mansion-owned-by-student https://torontosun.com/2016/05/12/311-million-vancouver-mans... 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...
kareemm 6y ago
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.
throw0101a 6y ago
> 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 https://en.wikipedia.org/wiki/Snow_washing
- novok 6y ago
  You also have to pay a yearly maintenance fee of ~$400/yr plus whatever your paying to a firm to maintain the corp FYI.
  - Red_Leaves_Flyy 6y ago
    For a $15,000,000,000 market annually that's pretty cheap for the participants...
inquirerofsorts 6y ago
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.

dathinab 6y ago

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.)

sumtechguy 6y ago
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.
throw0101a 6y ago
> (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. * https://www.youtube.com/watch?v=NdfmMB1E_qk 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_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...
- ordinaryradical 6y ago
  I think these kinds of terms typically only apply to commercial real estate, or large, multi-tenant properties, which is what your reddit comment was addressing. But perhaps things are different in Canada?

deleted 6y ago

[deleted]

fartcannon 6y ago

The xenophobia is a useful tool to distract from the real problem: investors.

cascom 6y ago
I think I’m the Vancouver case foreign buyer is highly correlated with money launderer (capital control kind rather than illicit gains)
- dahdum 6y ago
  Who has determined they are evading vs avoiding capital controls? Canada doesn't have the laws they are presumed to be breaking.
  - novok 6y ago
    They're avoiding the capital controls of China, because China has a history of executing it's wealthy on whim as the political weather changes.
tomrod 6y ago
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.
- nine_k 6y ago
  > wishing to preserve a locked down community How do you differentiate it from xenophobia?
  - fnord123 6y ago
    I'm just confused. I thought they're the same thing.

55555 6y ago

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

valuearb 6y ago
Momentarily only.

dahdum 6y ago

Has it been established what percentage of foreign buyers are money laundering, and by whose laws?

teunispeters 6y ago
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.

three14 6y ago

> 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.

kareemm 6y ago
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.
- three14 6y ago
  Prices are still associated with the prices that a local will pay. Money launderers don't want to lose dirty money any more than anyone else wants to lose clean money. They depend on there being a buyer at a price near what they paid. I suppose you could have a market that was so full of money launderers that they simply depend on flipping it to the next money launderer, but ordinarily, they depend on there being at least some proportion of locals who will pay the new, higher price, or they aren't guaranteed a buyer.
  - jbay808 6y ago
    A local who sold a home at an inflated price can often afford to buy another one at an inflated price. And it also attracts other generally wealthy investors looking to get in on a hot market.

jgalt212 6y ago

> 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.

kareemm 6y ago
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?
winkeltripel 6y ago
But the point of the article is that by paying too much for the property, the launderer drives the price of the market higher.

secondcoming 6y ago

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. https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/1/crossheading/unexplained-wealth-orders-england-and-wales-and-northern-ireland/enacted https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/...

specialist 6y ago

"...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. Right?

kareemm 6y ago
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.
- lotsofpulp 6y ago
  It’s more accurate to say it’s the huge supply of capital looking for somewhere to be parked that is driving prices higher. Demand curve is number of houses available for sale, supply curve is people looking to purchase those homes. As the curves shift, if the price goes too high, then the lack of supply of people with sufficient money would cause prices to stall or come down. But it’s apparent that the supply of people with a lot of money (or credit) is a lot higher than the supply of houses. Maybe it’s even more accurate to say that the supply of inflation protected assets in stable societies is in low supply compared to the supply of capital trying to buy those assets.
amscanne 6y ago
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.