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A Little Money Laundering Can Have a Big Impact on Real Estate Prices (2019) (betterdwelling.com)
292 points by throw0101a 31 days ago | hide | past | favorite | 306 comments



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...


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.

* 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...


apartments in my area are fairly expensive, but often come with special concessions for the first year of occupancy, often equivalent to a 15-20% discount. I notice that the lease is always very specific about stating the "actual rent" and the concession amount. I sometimes wonder what fraction of tenants is really paying the "actual rent", especially now that the offered me the first year concession again when I renewed my lease. is this a variant of the same finance strategy?


If you're in New York City, this may be related to rules on rent stabilization. Rent stabilized apartments can only raise their rent by a small percentage each year. These landlords likely want to be able to raise rents quickly if the rental market heats up, so they raise the "actual rent" by the maximum percentage each year but then give a concession so that they can actually find a renter.


People that work in finance aren’t stupid, they look at cash flow to determine rents and property value.

The discounts are there for the same reasons as the grocery store. It’s better for sellers as a negotiating tool and for price discrimination.


it seems like unnecessary complexity. why not just advertise a market-clearing price for the units you need to move? they already have a different quote for each individual unit, which fluctuates a lot based on market conditions. they don't post a price for a currently occupied unit until the tenant has confirmed they will not be renewing, so quotes can't really be used for haggling. there are no rules about max yearly rent increases here either.


Sellers will advertise the lowest price they are willing to accept once they get desperate enough. But generally, for low volume, high value transactions, haggling is almost always worth it for the seller.

Hence car sales, land sales, leases, company mergers etc all have a bit of back and forth as opposed to produce at a store. However, in poorer countries, I’ve seen haggling over vegetables too, but that doesn’t happen in developed countries since it’s not worth anyone’s time.


Because a low sophistication customer is better than a high sophistication one.


This makes sense. Something similar has likely happened with some apartment landlords as COVID hit big cities. Rather than lowering rents and triggering a re-valuation, they let occupancy slide but could argue that potential rent was still the same. Both of these cases do require that the debt has the valuation terms in it, which not all do.


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?


Yes, I think you are correct. I have never heard of a residential mortgage having a clause like that. It could definitely apply to store-fronts in NYC though


At the time of origination, residential mortgages will have limits on the equity-debt ratio. If you fall below a certain threshold (e.g. sub-20% downpayment) your lender may require you to carry private mortgage insurance (PMI). If your home's value were to fall substantially, your equity-debt ratio could be pushed below the threshold -- e.g. if tax assessments were updated.

I've never heard of situations that have re-triggered PMI... but it doesn't seem outside the realm of possibility.


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.


There's a youtube channel by a guy who ran/runs an Apple-affiliate repair shop. He has definitely seen storefronts remain idle for multiple years. I see this happen in my local area as well and don't understand it.


I know Louis Rossman has posited that landlords are handcuffed by mortgages that require additional capital calls when rental rates decline.

That may be a factor but it’s not the primary cause. This has been going on forever because commercial leases are usually 5-20 year commitments.

I’ve danced the dance with many landlords where they act interested in having you lease, but clearly your business isn’t what they consider a “good tenant” so they draw things out while they continue to look for a “better” tenant.


I worked with a commercial broker in NYC up till the pandemic broke out.

The empty spots in the city do speak with prospective tenants but often have unrealistic requirements for small companies and unrealistic pricing. Beyond the rent you may be required to have seven figures liquid to be in a position to secure a lease. Especially for a restaurant. Especially if there is a buildout.


Of course you do. Would you spend a hundred thousand on a custom buildout for a $1M lease if there was a significant risk the tenant would stop paying only a fraction of the way into the lease?

Things get a lot easier if you can take the space as is. But even then, if the landlord thinks your business is at a high risk of closing within a year, what’s the point? Why not spend most of that year finding a secure tenant likely to last for a decade or more.


There are very few small companies with liquid cash reserves in the seven figures. This makes Manhattan commercial real estate unaffordable for them.

This leaves many empty stores in Manhattan.


Louis Rossmann - He's done some good analysis around rents in NYC.


> 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.


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.


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.


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


Placing the interests of your homeland and neighbors first over foreigners is not xenophobia.


Comment is getting downvotes but agree. If you do not band together with like-minded individuals for your common good you will be outcompeted by other people who do.


Right, and the people that banded together to profit from this are the existing homeowners and landlords in Vancouver. The foreign investors are tiny in both numbers and political power compared to Vancouver landowners as a whole, and it really was existing landowners who profited, while flying a "preserve our great culture" flag by trying to not let new buildings be built.

The investors are the like-minded people who banded together to raise property values and benefit from it directly, while also exerting their will to keep new people out, or at least keep out everyone except the very wealthiest.

Calling this behavior "protective" of the city is tantamount to saying that the city is only for the investors.


> The foreign investors are tiny in both numbers and political power

The exact topic of this article: Small quantities of investors with different economic incentives can result in big effects.

> The investors are the like-minded people who banded together

I rather doubt that it was a concerted effort to band together. It's more akin to "curse of the commons": Each individual actor acting in their best interest results in emergent behavior.

The solution being pursued is to change the rules to dissuade certain behaviors that negatively impact the populace as a whole.


The effects of those small number of extra investors isn't huge however. In London it was 20% of the rise, but not most of it. It does fan flames, but there's got to be a spark to be fanned.


"Like-minded individuals" and people who share your citizenship are not the same.

By your logic, liberal silicon valley techies should band together to fire/cancel/censor conservatives who do not share their values. After all, like-minded people need to band together to out-compete the outsiders who think differently right?


>"Like-minded individuals" and people who share your citizenship are not the same.

Of all the people in the world the people geographically close to you and that share citizenship or nationality are the most likely to think like you or share goals that benefit both parties.


That is obviously categorically false, as evidenced by the political polarization within the US, as well as the large number of minority groups across the world (including in the US) who get persecuted by their own governments and fellow citizens.

Even if nationality is sometimes moderately correlated with the values you hold, when a stronger correlation exists, your alleged ideological commitment to forming in-groups and out-groups based on shared values should mean that people have the right (or even obligation) to discriminate based on non-nationality-based factors (e.g. liberals discriminating against conservatives in tech).


No, I said more likely to share, not will share. You can still disagree with your countrymen.

Nationality is correlated with the values you hold in the broadest sense. Easy example: a natural born citizen in the US is far less likely to believe in the validity of Sharia law than someone born in an Arab state.

In even more abstract terms, what is good for you is likely to be location dependent. People in Germany have different problems from people in the US or France, and those are different from African, Asian, and South American countries. There are of course common trends, but to pretend all of politics is some shared set of problems is ridiculous.

People discriminate based on traits all the time. Liberals in tech do discriminate against conservatives (or perceived conservatives) all the time. They are free to do so, most people don't see many things as something you can protect as a class.


I see this repeated elsewhere, and I don't understand it. I don't want to suggest that you're bigoted as this is getting alarmingly close to a culture war topic, and I recognize the difficulty in conveying that in person, much less over the internet, where "I don't mean to offend but..." is usually followed by something offensive. But I do want to understand your analysis of the game-theoretic conditions that you believe lead to smaller groups outcompeting larger groups.

Why would the most beneficial group of people that we want to band with be optimal when limited to a subset of the population, whether that's simply a random selection, or a potentially bigoted selection/identification mechanism like skin color, wealth, religious sect, family name, etc.?

I don't understand why a broader grouping (possibly global) of people wouldn't outcompete a smaller group, the larger group by definition has a larger capability...intra-group communication may be slightly more difficult with language barriers and cultural differences, and the relative contributions of sub-groups of members may differ based on their resources, but the sum total would still be greater.


It's not about bigotry, its that foreigners are detached from what is good for the people in the areas they're buying property in. The closer someone is, the more emotionally attached they'll be and the more that other successes (from reducing exploitation of people) will benefit them.


> foreigners are detached from what is good for the people in the areas they're buying property in

As opposed to the domestic billionaires who have deep compassion for the interests of the working class?


There's certainly a lack of caring there too. But they do have some financial incentives to put thought about the people in. It can hurt a personal brand when dealing with backlash against investment properties (and that can go on to affect associated corporate brands). It can also affect the investors if they mess up the economy of an area that had been contributing to their revenue.

I'm not trying to boil this down to "foreigners bad. locals good." But there are various factors that play in to how much one cares about their impact on others, with physical and political distance being two of them.


In the end the "foreigners" angle doesn't matter. If it were NYC billionaires buying up Seattle property and leaving it vacant the result would be the same: locals suffering at the hands of remote money.


> I don't understand why a broader grouping (possibly global) of people wouldn't outcompete a smaller group...

Ability to pool resources, ability and will to bend rules for the sake of promoting group's interests (ie. nepotism).


It depends. If the problem is rich investors, who may very well be local, accusing foreigners for a problem that they themselves created, then it's xenophobia.


Yes! Community is an important concept that we are losing during mass media, globalization, secularization, Covid, etc. This is sad since our direct community was what we evolved to interact with, some 20-100 people near us. I am hoping for the day we can have large gatherings again so we can re establish communities.


This attitude is exactly what destroys communities while letting investors profit.

"Protecting" communities by excluding people means that the only people that get in are the wealthiest, and because exclusion is the baseline, every new wealthy person kicks out a less wealthy person.

The exclusion is an excuse to enforce austerity, the classic means of squeezing the less wealthy to the benefit of the more wealthy.


I'm pretty sure OP just wants to know, and talk to, his neighbours; not smash the working classes.


> "Protecting" communities by excluding people means that the only people that get in are the wealthiest,

But the manner in which the community is "protected" in this case is by excluding wealthy foreigners who swoop in and pay huge sums over asking, sight unseen, for properties. Not sure how that could be detrimental to someone who isn't wealthy.


Why do you insist on defining community along citizenship lines?


I could understand this argument of putting neighbors first if Vancouver was as hostile to real estate investors from Toronto as they are towards real estate investors from China. Basing the level of hostility on the nationality of the investor seems wrong to me.


Investors from overseas can fuck off and buy something else. People who live in a city need housing, and it is completely within the rights of the city to restrict housing purchases to those who live there, or at least heavily dis incentivize it.

Seriously, "xenophobia towards investors" strikes me a bit like the Silicon Valley bit about comparing the plight of Billionaires to enemies of the third reich.


>Investors from overseas can fuck off and buy something else. People who live in a city need housing, and it is completely within the rights of the city to restrict housing purchases to those who live there, or at least heavily dis incentivize it.

You completely ignored the point I made. How is an investor from China buying real estate in Vancouver purely for investment purposes with no intention of having anyone live there any different than someone from Toronto doing it? Why is the former punished harsher than the latter?


The farther away the investor, the less stake they have in local success. In-country folks will be paying more taxes in-country, which affects things like social programs, infrastructure, and defense that contribute to a region.


But those people in country would be paying national taxes either way. It isn't like if Vancouver stops a rich person from Toronto investing in real estate that this person will leave their millions of dollars in a checking account instead. They will find some other way to invest their money.

If you are solely worried about the tax base, wouldn't bringing in foreign investors into real estate investing while letting domestic investors focus on some other investment vehicles lead to more tax revenue?


Perhaps. It's not hard to imagine that having additional competitors to local real estate with the result of driving up prices is not in the interest of the locals, who need places to live.

That one group has less stake and can be discouraged through legislation while another has some constitutional-like protections is not a compelling problem compared to the one in the paragraph above.


What about the interests of the canadians that are selling their houses?


I'm sorta getting "Deutschland, Deutschland über alles, über alles in der Welt" vibes


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.


In Vancouver's case, I don't think there's a strong desire to maintain a locked down community -- at least, not among the voices who complain about run-away real estate prices.

What there are complaints about are foreign investors who bid up property prices but don't move to the city, at least not before retirement age.

This causes a huge disconnect between the price of land in an area, and the earning potential in that area. For people who hope to own land but don't already, it's always out of reach, because they aren't competing with their peers, and the wealthy pockets that are buying homes aren't customers of other local businesses. It's not quite the same as a cluster of unicorns driving up tech salaries to the point where teachers and nurses can't compete on the market. There are no unicorns based in Vancouver. It's hard to identify any career path, even doctor, rockstar engineer, or lawyer, that a high school graduate today could expect to follow while working in this city and be on track for home ownership when time comes to start a family. Assuming that the trend continues, that is. And if it corrects, then it's a question of who was unlucky enough to catch the knife -- because any young locals in the ownership market are going to be highly leveraged, there's no other way.

That might read like xenophobia, but actual immigrants who intend to live, work, and raise families here are generally warmly welcomed and appreciated no matter where they come from. There are some people who get their signals crossed but it's a small minority.


Also if your an immigrant who is resident in Canada, your not subject to these taxes! It's a 'you gotta live here' tax.


Not subject to the foreign buyer tax, yes; it's unclear that these taxes have actually solved the above issue though. For money laundering it's an acceptable cost of doing business; for others there are ways around it (hence the 20-year-old undergrads prepared to pay $1.4 million in cash that another commenter mentioned).


> wishing to preserve a locked down community

How do you differentiate it from xenophobia?


Depends on the community culture and what they perceive as outsider behaviour. e.g. A protestant might not be welcomed in a catholic neighborhood.


But isn't "outgroup members are not welcome" the definition of (mild) xenophobia? Indeed, religious disagreements are a major source of it.


I'm just confused. I thought they're the same thing.


One is proactive assessment by a community, the other is blind bigotry against outsiders. The inclusion of bigotry as a deciding component is the key, IMHO.


One wants to proactively stop outsiders from joining their community. The other stops outsiders from joining their community using bigotry? Can you see why I'm confused?


No. I may be seeing an argument of semantic similarity, but the inclusion of bigotry is the defining factor of xenophobia. Closing down a community can be due to other drivers beyond fear of outsiders.


I think I’m the Vancouver case foreign buyer is highly correlated with money launderer (capital control kind rather than illicit gains)


Who has determined they are evading vs avoiding capital controls? Canada doesn't have the laws they are presumed to be breaking.


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.


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.


there are plenty of sad places in this world who got rid of investors ...


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.

https://www.legislation.gov.uk/ukpga/2017/22/part/1/chapter/...


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


Momentarily only.


>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.


> 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


You also have to pay a yearly maintenance fee of ~$400/yr plus whatever your paying to a firm to maintain the corp FYI.


For a $15,000,000,000 market annually that's pretty cheap for the participants...


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.


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...


> 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?


But the point of the article is that by paying too much for the property, the launderer drives the price of the market higher.


"...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?


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'm also offended by the blame of foreigners.

Core problem is housing shortage. We need more. I don't care how we get there. So I support upzoning, MIL units, penalizing unused (vacant) units, and any other idea for increasing supply.

We just need to figure out what policy mix works. The blame game is just a distraction by the incumbent players.


The argument being made is that this wild speculation is enabled by the money laundering. If you know laundering will keep happening with impunity and that the whole thing is tacitly approved and backstopped by the Canadian government, then it becomes rational to participate too.


That may be true, but it doesn’t change the fact that locals share a large portion of responsibility. Money laundering is no doubt happening, but the activity is tiny as a fraction of the market.

To give an example of how exaggerated it is: before implementing the empty homes, the city of Vancouver estimated that 25,000 homes were empty. The final result: only 2,500, one tenth what everyone thought.


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.


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.


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


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.

[1] https://www.vvdailypress.com/article/20121001/BUSINESS/31001...


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.


victorville may very well get a high speed rail station in the coming decades.


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.


The Tamil Nadu state government (and a few other states), in India, did something like that - when the real estate market fell a bit, the government noticed that the developers were still holding on to many ready-to-occupy flats (condos) in the hopes of getting a higher price later. The government immediately issued a notice that once a residence is constructed by such developers and is ready-to-occupy, property tax and utility bills (for water) has to be paid for it whether it is occupied or not. Thus builders stopped building in excess or holding on to it to cut supply and artifically raise demand (and thus prices).


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.


Georgism? On my Hacker news? What a time to be alive.


Basically this means that all land is effectively rented from the government. It's an interesting proposal, but how would price discovery occur?


There are still sale prices, the difficulty is separating the land portion from the improvements portion. This is currently performed for many purposes, including insurance, which has the benefit of being tied to somebody's valuation, rather than a standard assessors estimate.

However, this idea originated from a time before we had zoning restrictions like we do today. Which also means that any change in zoning would result in a big change in land value too. One could also imagine transferring zoning allowances, much like air rights are sold in NYC, so that people that don't want to change their property can instead give their greater density allowance to person down the street that wants to change their duplex into a fourplex, or something. Such transfers would also be near to zero dollar activities.

But given our current difficulty with handing out any sort of zoning change to allow more people to live in high demand areas, I start to think that this idea is hopelessly poisonous to land politics of entrenched powers (land owners). Still, one can dream.


Sale prices are part of a feedback loop with taxes.


Good except for retired folks with less income or investment income. Perhaps just make a homestead exemption.


You can make a homestead exemption. You can also make property taxes lien-able on sale or transfer of the home, which makes some sense in areas where property values are rising quickly. If you are fixed or low income and care more about having a place to live than making money on the property, that works too.


We kind of have that... property taxes are deductible from your federal taxes if the home is your primary residence... although they put a cap on the amount a few years ago, and it isn't nearly as valuable anymore.


BC has vacancy tax:

* 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...


You have a seemingly unlimited demand for a good at any price . Produce as much as possible and sell as much as possible is a more sensible approach.

Each house sold to a chinese person makes canada as a whole one house-worth richer.


So just pave over Canada's best farmland (the fraser river delta) with unoccupied houses built for "export", and don't worry about providing them with transportation networks, schools, etc under the assumption that nobody will actually live there?


This is hilarious, like maybe make them so that they don't have interiors, just a shell of a house!


Whatever works, why not. Why would canadians as a whole refuse to get richer so easily?


Yeah though when it collapses, i.e. due to foreign policy, local government will likely end up with the costs tearing down abandoned houses and a drop in real estate tax even on everything, I believe they call that phenomenon "Detroit".

Attempting to keep a buffer for that away from the various interest groups is impossible even if you defy the physics of money in politics to adequately tax profits that can buy politicians.


> Yeah though when it collapses, i.e. due to foreign policy, local government will likely end up with the costs tearing down abandoned houses and a drop in real estate tax even on everything, I believe they call that phenomenon "Detroit".

That's an idea of what could happen, but it is not what is happening. Of course it would be better if the properties bought by foreigners were rented out, and the incentives to do so are very strong already (making rent money!), but even if they aren't, the worst case scenario is an eventual reposession of the property meaning again that Canada is one house-worth richer!


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.


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.

China's been pretty heavy-handed in its enforcement of these rules. As noted earlier, they basically killed off Chinese cash buyers in the US market in California, and have done the same to Vancouver.


I don't think you've been reading news over the last year about Canada being considerably unhappy with China these days. I'd disagree with your characterizing the liberals at not doing anything. Also have you been paying attention to the meng wanzhou CTO of Huawei at all? I'm tempted to fact-check the rest of your statements as a function of the complete inaccuracy of the last one but that would take to much time :)


He might be Albertan. I'm in Alberta and a lot of people here are in their own filtered news bubble. They state as fact that Trudeau is working for China directly, or 'worse', is somehow a secret Muslim... It's an alternate reality here, and very sad. :(


I don't see how his arguments are highly specious or any less accurate.

> 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.

Yes, if you have the right connections, which almost all these investors have, it's no biggie to move money out of China. I don't know about Canadian laws to make a comparison about Canadian laws to a Caribbean banker in the 80s. But I do know that the Chinese are plowing money everywhere - Malaysia, Thailand, parts of Europe, Singapore, almost all of them are being massively bought by Chinese investors. Does not take a genius to figure out that the CCP plan has either failed, or more likely was just political grandstanding for their Weibo and QQ fans.

> Even a municipal vacancy tax is just a new cost of doing business.

When you're a monied investor, taxes just become operating costs. I remember back in the day, my family in a Gulf country had to pay an exorbitant part of our income to get a "license fee" to set up a tiny restaurant no bigger than a Subway. Now, I just opened a satellite office for investors in one of the fanciest districts in the country and those license fees are just a cost of doing business. Not to mention, I'm getting a fuck ton of local subsidies to do that, driving my costs further. This is the case with almost all major cities in emerging markets I know of struggling to build an ecosystem (Singapore, KL, Dubai, Riyadh, etc).

> 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.

I don't know if it's tied to the Liberals, but the CAD has seen significant devaluation against the dollar the past 5 years or 10 years (excluding the effects of USD appreciation too). I also do not know about Canadian govt incentives to boost real estate, but that's not far fetched to assume from #2. Current requirements for citiznship by investment (in Quebec, the federal programme was shut down) show a requirement of only CAD 2 million as net worth, not even direct investment, and an intention to settle in Quebec. Alternatively, one could set up a BS company and get a federal pass through. Both of which aren't hard for the typical Chinese investor to prove. So yes, the government programme does come with an easy passport at the end of it.

Lastly, let's be honest - Canada only took on Meng Wanzhou because the US told them to. If they were really serious about Huawei breaching the Iran sanctions, they would have to arrest a number of other Chinese businessmen who own property in Canada, as well as a number of Arab and Iranian businessmen, who don't have qualms skirting the sanctions. Canada is only standing up to China at the moment, because they have US backing, and because it's Meng Wanzhou.


1. CAD to USD devaluation is largely a function of the price of Oil & Gas. The lower the price of oil & gas the lower the CAD to USD ratio, it is not attributed to the BOC monetary operations.

2. If Canada was serious about taking on Huawei it would have done so when Huawei allegedly stole IP from Nortel back in 2008-2009. However the Harper conservative government at the time did nothing in fact only bailed out auto companies during the financial crises instead of helping out tech.

3. And yes, of course Canada is standing up to China because one of the benefit of Canada is that the US us their closest ally.

4. Can't speak to your first statement but it seems hyperbolic ("Caribbean Banker blush") - and like I said earlier not going to do the research given the other statements.

5. Yes MVT is an added cost of doing business that can tilt the scale to the point at which it isn't worth doing the business anymore for foreign buyers. I did read that the Vancouver and Toronto market cooled significantly after that was implemented. It is can also be construed as a signal that the behavior is now being watched and monitored.

edit: for formatting


1.) I forgot for a moment there that the BOC uses fuel prices as a gauge to regulate currency values. But that wasn't my core point, nor was I attributing it to Liberal policy (kinda stated I don't think it has anything to do with that).

2.) I don't mind criticizing the Harper government. In fact, I'd readily place them below Trudeau's. But I don't think Trudeau's would have aggressively pursued Chinese IP theft. In fact, no Western government would have. What did Obama do when the Chinese were stealing IP from Western universities?

3.) Again, as I said, I don't really know about Canadian KYC and AML laws and the "Caribbean banker blush" thing. But one cursory glance, and it's easy to find so many loopholes in the current policy which was created to dissuade investor citizenship.

4.) Canada is only positioning itself for its strongest ally, just as Australia. Till the trade war began, I dearly remember how Canada and Australia had these nice treats and fancy dinners for Chinese investors that weren't available to investors from other places. Not that I'm complaining, but some special treatment was certainly meted out to the Chinese, via regulations and otherwise. Which led to the current shit show.

5.) Vancouver and Toronto are still on the high side. Let's talk when those places become affordable to buy into for native city folks. But as always, for most big issues, we'll continue putting a Band-Aid solution over it.


Yes, if you have the right connections, which almost all these investors have, it's no biggie to move money out of China.

There are a few ten thousand Chinese investors with U.S. projects that wish this were still true, so if you have a method for doing this, you should let them know immediately because you will become an extremely wealthy individual (if it works).

But it hasn't been since 2017, when they cracked down on the use of surrogates to move money out of China. (China first cracked down on direct transfers in 2014/2015. I had a number of clients at the time that were directly effected by these measures.)


Funny then. I'm seeing Chinese money move into Bangkok and Singapore very recently.

By connections, I meant CCP connections. Knowing the right people in the party hierarchy (Xi followers, not overtly ambitious, some common sense between the ears, etc) can make you go a long way.


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.


Lots of good points here, but this last bit is not realistic:

> 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).


I agree with everything you've said, except the last point. The federal government has shown that it will do what's necessary to maintain the status quo. As each COVID benefit runs out, another one is added to replace it. How long can they keep this going? I don't know, but I'm not willing to bet against all the people who own 1+ homes and the politicians who represent them.

I personally delayed buying a house in Toronto since 2013, thinking that it's too hot and it can't keep going up. I missed out massively. I don't recommend young Canadians to wait, but rather buy your primary residence if you can before you're completely priced out of the market. Just don't put all your investment into housing in the GTA, it may pop one day.


Well it’s true that my advice is not pragmatic. The market can remain irrational longer than you can remain solvent.

But I wouldn’t encourage FOMO by saying “buy or you’ll be priced out!” since it’s just perpetuating the assumption that it’ll last forevér. It won’t. But it might last a while.

If you really want a house and can afford it, buy a house. But understand the reality of the financial risk. That’s not just coming from me, it’s coming the Bank of Canada and many other international organizations.


1. "crazy cult of home ownership" you're talking about the thing that has driven middle class wealth accumulation for most of the past 100 years? crazy cult.

2. "opt-out of the cult of home ownership, and just wait until buying makes financial sense (i.e. the bubble bursts or deflates)"

For the bubble to burst, the things driving it have to change. Since the 90s, floods of global money have been driving up the cost of housing in canada's major cities. The bubble has been bubbling for 30 years. "just wait" is not actually a viable solution.

Recent changes - an empty homes tax and a foreign buyer taxes - have been attempts to curb the problem, but it's not like we've tried all the tools in the toolchest - we've barely tried anything.


A home is place to live, not some magical wealth generator.

The cult is that it is seen as such, and people have it in their heads that home ownership is the most important component in financial success.

The reason that you note “just wait” is not a viable option is surely because you also view home ownership as something you need to do. But you don’t need it, you just want it.

Blaming global money is the easy thing to do, but I don’t think there’s compelling data that supports this. Sure, it has had an effect, but Canadians themselves hold a large share of responsibility for the market today. This is why the empty homes and foreign buyers haven’t really done anything — they are just populist measures. If you really want to have an impact, fight local speculation too.

Regarding the middle class wealth accumulation, Canada is in for a world of hurt when the bubble bursts. A shocking proportion (1/3) of Canadians nearing retirement have no assets outside their primary residence, and their plan is to use reverse mortgages or downsizing to fund their retirement. This is because so many Canadians live at the edge of what they can afford, commonly known as “house poor”, which is the phenomenon driving a lot of local prices.

What is happening now is a massive intergenerational transfer of wealth from the younger generation to the older generation. When the bubble deflates, everyone who sold their house is making bank, and young people who were desperate to have a piece of dirt are the ones who will be holding the bag.

I’m not saying you shouldn’t own a house if you need it and can afford it, but the idea of a home as a “wealth generation” device will not age well in Canada.


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.


A property management company and accountant can solve these issues and pay for themselves.


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.


housing is not finite


With enough zoning it absolutely is, not to mention the lead time required to permit and actually build it. Once built depreciation kicks in - housing isn't permanent. It's a consumable.


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.


Renting property comes with significant liabilities, and may not be worth it if rents aren’t high enough.


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.

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


How is the Canadian government allowing this to happen? They should ban Chinese from buying and driving up prices, it's quite obvious what's going on.


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.


That's a very short sighted approach. They're going to pay for it in the long term.


You're right, it's just that the people who are going to pay for it in the long term is not as politically active/connected as the people who's going to benefit from it in the short term (and possibly will die before the consequences appear).


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.

IMHO more transparency would help.


That would be great I can't see why they wouldn't have a process like this.


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?


Not just Canada either


>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.

How exactly does this part work?


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


>> 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.


I haven't heard this side of the story before. How do they count empty houses? Is it done in a way that makes it difficult to game the system?


It's based on an affirmative declaration - every property gets a letter sent to its owner or listed representative annually, containing the declaration. You return the declaration (or submit it on the British Columbia website) before the deadline affirmatively declaring that the property isn't empty.

If you (or no one else) don't make the declaration, the property is taxed. If the province and/or city can't find you, a lien is put on the property (which can eventually be used to force a sale).

If you falsify the declaration, this is legally equivalent to a false affidavit, and you can be prosecuted. The tax is fairly small, to encourage compliance.


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.


Similarly, the same often goes for classification of people as racist without the burden of evidence or thinking.


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'.

Ex: https://www.nytimes.com/2017/07/21/upshot/when-the-empty-apa...

https://theweek.com/articles/736313/how-foreign-investors-la...


Yes, there are a lot of bad actors are in the system, which is why punitive measures need to be enforced. We can't pretend that they aren't being sneaky about their finances. China in particular has been notorious in their two-facedness presenting their economies as safe havens while covering up their underhandedness. If they aren't put on the spot and faced directly for what they are under their mask, they'll continue to shapeshift and avert transparency into a system that disproportionately benefits them. Economists have long predicted their economy is in a bubble, but because of the way they prop it up, they are able to inflate far longer than they would in a more transparent world, thus drawing investors into their falsely good looking economy while acquiring foreign assets that have real value with that extra purchasing power.


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.


The jobs associated with planning and building are clearly a positive in an absolute sense. The counter-point is this positive aspect is very much outweighed by the negative aspects. The housing supply for people who actually need somewhere to live is being limited which drives up the housing prices and rental rates.

Re-reading your comment, it feels like you've missed the point that these units are largely not being made available to the housing market.


Foreign capital influx isn't bad unless the capital that is being traded is bad, which in this case it very likely is.

On the direct trade it's a win for both sides, the side with bad money turns it good, and the the side with the asset converts it into capital (just like every other trade, which is always a win for both sides), but not at a broader level where illegitimate funds enter the system and become legitimate, whereby the one producing the illegitimate funds are the true victors, stealing away with real value while the rest of the market is destabilized for introducing illegitimate turned legitimate extra capital.

To clarify, by not doing due diligence and allowing funds created in a nontransparent shadow banking system to enter the real market, you are giving the power of printing money to a foreign entity.


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


Folks rent these condos at a high price, and folks working in that area buy condos at these market prices.

It is not like high priced art.


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.


Wealthy Chinese fleeing oppression aren’t money launderers.


They are if they don't follow rules.

Your political issues do not free you from following tax law.


Evading Chinese capital outflow restrictions occurs on the Chinese side. Vast majority of real estate in Vancouver adhere to Canadian law, the industry is very well developed, agents and lawyers cross their T's and dot their I's.

The issue is there are just too many wealthy Chinese people. Essentially any Chinese citizen who owns property in tier1 Chinese cities, many snatched up 20 years ago for nothing, can afford to buy 1M+ homes in Vancouver or Toronto if sold. None of it involves black money, just being lucky at the right place at the right time and having a desire to live in Canada. The TL;DR: is there's like more legitimate Chinese millionaires by wealth than there are Canadians.


What Canadian tax laws are they violating?


Would you say the same thing if I embezzled a bunch of money in the US and moved to China?


That’s illegal in both countries. Are these money launderers being extradited back to China for transferring their own funds to Canada, like an embezzler would?

No, because that’s not illegal in free countries.


If they continue to live, work, and do business in China, then it doesn't count as fleeing.


Diversifying your net worth internationally to create an insurance policy against worse oppression by your regime is a first step towards fleeing.


Not... really, at least not in the sense that "fleeing oppression" typically conveys. That's fleeing oppression about as much as any other multi-millionaire with holdings in a Swiss bank account is doing.


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.


Yes but fairly easy to use houses to launder Mony (if you have enough clean Mony). It's also not to hard to abuse houses for speculative investments and houses if well invested are lastly not prone to turn worthless if there is a big crash. So in the right areas they are a "I lose at most a bit but never all" safety investment you can also use for Mony laundering.

Very attractive for certain kind of wealthy people.

So even if a price rises for normal reasons that people tend to always mingle and drive prices even more.


It could does not mean it does.


My understanding is that much of the reason for parking money in these properties is to get around local (that is, their local, our foreign) tax laws and wealth regulations. If that's the case, it's not different from money laundering. "Tax avoidance" is tantamount to money laundering.


Tax avoidance is not money laundering. Not even close. TFA does a good job of describing the process, of which zero pieces fit "purchasing foreign property to avoid local taxes". Reintroduction of these funds back into the local economy after performing whatever tax avoidance tricks might qualify as money laundering.


Tax avoidance and tax circumvention are not the same.

First lesson my tax attorney taught me. ;)


I'm sure he'd very much like people to believe so.


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"?


I think the fact they're not allowed to take money out of China makes it laundering by definition. They're hiding illegal money from the Chinese government (once it leaves China it's illegal to hold as I understand it) and legitimising it in Canada. From Canada's perspective, it's probably not laundering depending on how it was originally earned.

> next to the sea and the mountains

Next to the US is probably another big reason but I'm not sure how much that matters with planes.


OK if they consider all Chinese investments "money laundering", their theory seems more plausible. Still needs verification, though.


Sounds like what Bay Area buyers are doing to Hawaii. And that’s not money laundering. Just saying other explanations are certainly possible.

https://www.sfgate.com/hawaii/article/Hawaii-real-estate-mar...


> 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.


It would be almost impossible to tell in any case, and even what is money laundering in the west might not be considered as such in China.


> Where did all the money come from?

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.


"A plausible explanation" - sorry, no. They offer a "just so" story. Science it ain't.


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...

https://www.msn.com/en-ca/news/canada/rcmp-detachment-head-w...

https://www.msn.com/en-ca/news/canada/virtually-no-controls-...


Oh, I'm very, very sure money laundering is happening in BC. I'm certain money laundering via real estate is happening all over Canada; Chinese investors are buying abandoned farm land in Northern Ontario for some reason.


I agree, and frankly I understand why Chinese people want to get here. It's a great place!

But we can't have vast sums of capital, of unknown origin, flooding our country and pricing out our own citizens.


Agreed. We definitely need New Zealand style property ownership laws, this is getting out of hand.


I'm not sure the former owners of the houses would agree. They made good money from the houses they sold to Chinese people. Is that necessarily a bad thing?


Yes, it is a bad thing. Many of those condos and homes are now empty, raising housing prices on families and making effective city planning impossible.


I'm not convinced. If Chinese investors buy properties unseen, you could build lots of cheap apartments and sell them for lots of money. Sure it would be wasteful for a while, but in the end a lot of money would have flown to Canada, and presumably at some point the madness would stop.

I'm guessing regulation is the real problem, as it is so often.

Even if foreign investors let houses sit empty, the rising prices should be an incentive to build more houses, leading to more supply of housing eventually.

Speculation is after all a bet on future demand, and useful for anticipating future demand.


Like most econ-101 reasoning, the "eventually" is doing a lot of work here.

From a policy point of view, it's easy to see why the picture is a bit trickier. Allowed to proceed unchecked, the underlying mechanism you describe will displace a pretty large fraction of the current population, especially as the offshore money fundamentally doesn't bring in much local economic activity after the new construction. These are the people you represent as a government, not the putative future immigrants and speculators.

"Surely it would be wasteful for a while" here represents a multigenerational disruption to a large fraction of your voting public, the majority of whom will see little or no benefit from the incoming money, and the overwhelming majority of whom will see negative impacts.


Why would it displace people, if you build cheap houses to sell to Chinese Investors?

That an influx of money doesn't benefit the economy would also be interesting for most Western governments. "Stimulus" by monetary means seems to be a very popular approach currently. (I don't know, but it seems debatable).

I also don't think prices are going up only because of Chinese investor. I also live in a city with the problem of steeply rising prices (Berlin, Germany), but the fact is simply, it is a very popular city with many people wanting to live here.


There is a lot of research on this you can follow up on but short story on your first two points is a) a combination of old stock sales and rezoning is pricing existing residents out of neighborhoods, and b) the money isn't effective as stimulus, it's "parked". Besides the fact that "trickle down" theory has proven a failure at this point, there is no local value to a non-resident whose economic activity is done elsewhere not living in housing that is also not rented.

I think your last point is clearly true also, but the balance isn't obvious.


Research in that area is unfortunately very politically loaded. I don't think simply claiming "there is a lot of research" in such a politically disputed subject is sufficient.

As for b), if a Chinese investor buys some house from a Canadian, why is the money parked?

Trickle down or not, it seems in general if you can sell something (in this case houses to Chinese people), it is good.

If you build houses to sell to Chinese people, you also employ people from the building industry, for example. I'm not convinced that "trickle down theory" is the correct theory to apply there.

Special issues presumably arises with land and housing as a good - you shouldn't simply sell all your land to some foreign powers, presumably. Still, in general it holds.

If you worry about land area, you could build a huge skyscraper in a corner of the town that doesn't disturb too many people, and sell the flats to Chinese investors. Very little land use, huge margins.


I don't need to convince you. The issues in BC are well documented.


No, but it is a tragedy of the commons situation - the individuals make out like bandits while the social capital is drawn down.


Do they really "want to get" there? Don't they just buy the assets and leave them unoccupied?


It's a combination of getting cash out of China etc. and having a safety bolt hole.


>Do they really "want to get" there? Don't they just buy the assets and leave them unoccupied?

I'm sure it's both, and it's really hard to determine in advance.


I agree with what you're suggesting - the article presents a theory that, while interesting, is only supported by circumstantial evidence.


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.)


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.


No, that's the myth that keeps getting repeated.

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.


> 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.

Sure, but what if we are talking about $200M instead? Now you want to go for the most expensive assets because you want to reduce the number of transactions (each transaction has a time overhead that is probably more significant than the dollar cost overhead). You know you aren't getting it done in one transaction because that $200M widget isn't out there.

Now assume you know that there are plenty of other money launderers operating in the same market. And you know logic behind the article. Now you aren't so worried about overvaluing an asset by 5 or 10%.

Just a thought experiment, I don't have any evidence or even anecdata to back it up.


okay, now what if the $100 widget is purposely set up to obfuscate the transaction/trail and the actors involve help you (like say a new developer that is wink wink) and the $200 increases your chances of getting caught?

i think nobody is arguing that you want the best bang for your buck, but there's a reason why someone will just flat out offer 20% over asking or letting these properties sit unrented. that's a terrible return on investment...

i duno, makes sense to me. when laundering the priority is always don't get caught > profits. housing seems to be at the moment the most unregulated and harder for authorities to pin and hold those accountable.


> i think nobody is arguing that you want the best bang for your buck

Bizarrely, the article and several commenters here are saying precisely that money launders don't want the best bang for their buck.

> but there's a reason why someone will just flat out offer 20% over asking

But nobody is doing that. The article seems to be assuming that, commenters are assuming that, but where's a single piece of evidence? If offering the asking price guarantees you the deal, offering 20% more is insanity. Nobody would do that.

You seem to be claiming that, somehow, overpaying for real estate... diminishes your chances of getting caught? (And several commenters here are assuming that too.) But it doesn't. Why would it? What would the mechanism even be?

I swear I don't understand where this idea is coming from, that overpaying for real estate does a better job at laundering money or something than simply paying market rate. It doesn't make any sense.


i mean i don't think they might be flat out offering 20% or over, but i have realtor friends that quite commonly do the whole "closed in X days, 15% over asking cash!". so obviously people are coming in with high bids intending to just push out other people quickly.

and i wasn't claiming that paying more prevented you from getting caught purely from a price perspective. i meant more that maybe there are mechanisms at play where this premium is somehow built in. like say you have a shady developer that caters exclusively to this type of clientele. why buy 10 units in a normal complex and invite scrutiny, when you buy this multimillion dollar unit in a boutique building and everything is setup to help you and all parties get the benefit.

manhattan real estate at the top end (i'm talking like 10M+ price units) are absolutely "tanking" during this pandemic. those prices are not subject to the typical market force. i'm just speculating of course, but i see it like how people speculate on art as laundering. the value is completely just whatever the heck these rich people say it is as it changes hands.


> 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.


> launderers don't worry about price

Is the opposite of "launderers want to buy extremely overvalued things."


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.


yeah but laundering demand is less price sensitive.

If i am laundering money, i am OK paying some "tax". That's how laundering works in general. Even in case of car wash, they show it as a legitimate income, and they do pay tax on it - they just happen to make the money through illegitimate means.


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.


> willing to take a loss on an asset

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.


LOL "laws of economics"


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.


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.


A nitpick about your comment (I agree somewhat with your general point):

> a theory about energy bonds cannot be applied to urban real estate

That's why capitalist thinkers like Smith and Ricardo came up with separate theories for land. See https://en.wikipedia.org/wiki/Law_of_rent and https://en.wikipedia.org/wiki/Rack-rent

Now, it's another matter for people in the modern day to actually know about and use these theories, instead of the reductive "land = capital" model...


(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.


The classic example of this is a $31m house owned by a UBC student in Vancouver:

https://torontosun.com/2016/05/12/311-million-vancouver-mans...


This is insane - feels like something fishy going on... I wonder if business people in China use students and pay them a fee of some sorts to facilitate getting around KYC requirements etc?:

“Land title documents list Tian Yu Zhou as having a 99-per-cent interest in the five-bedroom, eight-bathroom, 14,600 square-foot mansion on a 1.7-acre lot at 4833 Belmont Ave.

Zhou’s occupation is listed as a “student.” The other owner of the property, which boasts sweeping views of the North Shore mountains and Vancouver, is listed as Cuie Feng, a “businesswoman.””


I’ve been told similar stories by real estate brokers in NYC.

Students in university cold calling brokers, looking to buy the “most expensive condo” in an agent’s book, sight unseen, and willing to pay in cash or wire transfer.

As a broker, it must be very hard to ignore those incentives. The commission on just one of those sales must be incredible.


Totally OT: apologies but gen220 you don't have contact info in your profile.

You mentioned in an old thread a few months back about using pandoc for versioned documentation in your organisation. I'm looking at doing that now -- converting to markdown, putting files in git. What we really want to do is allow users to comment their copies and the comments be kept across versions. I wondered if you had ideas on that. Currently we use PDF but Acrobat pins comments to page numbers and so they can be completely in the wrong place of pages are removed. We're using manuals that are 1000+ pages.


Heyo! Happy to spitball this with you.

(Un-)fortunately, we started in a place where we already had plaintext-ish documentation (we never started with PDFs), so we were converting text to PDFs, not the other way around.

People edit the files in markdown and "publish" them in pdfs.

Generally, we do comments in a combination of google docs views of the PDFs (not-preferred, because they die with the document version) and our code review system (preferred, because they live forever, but unfortunately exclusive to engineers).

I actually don't know to what extent pandoc supports the conversion of existing PDFs with comments to markdown, but that sounds like a really hard problem!

The way I'd move from your situation to mine, is to say "no more comments in pdfs", convert the manuals to plaintext at once, make a comment-less PR of the plaintext manual to the repo, and then hack the comments in as comments on the PR, in a way that depends on your code revision tool.

This might be very hard depending on your CR tool. Let me know if you have any more specific questions, though, I'm happy to help.

I'll also add contact info to my profile. :)


That's brill. I'll ponder some more and maybe try and get in touch ... thanks.


Anecdotal fairy tales are the best fairy tales.


This is now the 4th comment of yours I've come across in this thread, all offering no evidence of what you claim. Rather than just repeating "you're wrong" over and over again, you'll get a lot farther by clearly explaining why the article is wrong, once.


Straw buyers exist, not denying it.

Straw buyers who are entirely price insensitive may exist, but are so rare as to be unicorns.

If you are actually “laundering” money, ie from a crime other than fleeing oppression, the cost of laundering matters. Buying a $1M condo for $2M costs you a 50% of your ill gotten gains, and there is still risk of seizure.

At those costs there are far cheaper routes for laundering your money.

So what’s occasionally happening is that Chinese trying to escape the control of the PRC dictatorship send money to a trusted expatriate, sometimes a student, and tell them to pay up to $X for a property at market prices. Naturally this can lead to paying slightly over market because the proxy isn’t motivated to negotiate, or often equipped to.

If I price my home at $1M when it’s worth $950k, they’ll pay the $1M. But they aren’t offering me $1.4M. And it’s questionable what the specific market price really is at any moment.

My friend recently bought a home for $605k that was listed at $599k. He got an early preview the day before it’s initial open house. That night He made a full cash offer at $6k over ask that expired the moment the open house started. The buyer accepted 15 minutes before expiration.

Did he overpay? The buyers received over a half dozen backup offers during the open house, some as high as $30k over ask.


FWIW, the pre-sale buy side of the real estate is not transparent.

These kinds of people usually do not normally get past the KYC stage required by NYC for large real estate sales, and therefore do not end up recorded in the public record.

By definition, the only data that you can reasonably expect to exist about this phenomenon is "anecdata".

I make no statements about the frequency of this phenomenon. I have no reason to believe that such tales are common. However, given the preponderance of stories on the topic, it's hard for me to believe that it never happens.

This all being said, there are worse money laundering and real estate crimes out there. This is just a particularly amusing one.


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