How a Little Money Laundering Can Have a Big Impact on Real Estate Prices

How a Little Money Laundering Can Have a Big Impact on Real Estate Prices, by Stephen Punwasi.

Money laundering is the process of making illegally-gained proceeds appear legit. … The goal is clean money. Parking cash long term in assets is not typical — these aren’t investors. …

The marginal buyer is an important part of any asset market, especially fast moving ones. This is the person(s) or company that’s willing to pay the most for an asset. They are a small percent of the potential buyer pool, but the ones that actually buy the assets. The competition between marginal buyers is key to asset price escalation. …

If the marginal buyer is a rational investor, they’re thinking about liquidity. They’re restrained in their bidding price, because they need to be able to make a profit. Rational consideration helps to keep a market sane. If the buyer isn’t bound by rationale or logic, things start to get sloppy. …

When you buy an asset, whether a home or an oz of pink kush, you try to get the best value for your time and money. You want a deal. … If you are money laundering, that’s not the case.

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. …

Still think a small amount of money can’t influence prices? Clearly you’re not familiar with another asset class – stocks. CNBC host Jim Cramer once ranted that his fund could manipulate stock prices with as little as $5 million. … Academics determined traders can use less than $500,000 to raise a stock price 1%, by targeting the bottom half of the liquidity spectrum. …

Transparency International UK found a significant correlation between shell companies, and elevated prices. London for instance, has 87,000 homes owned by anonymous companies. According to Christoph Trautvetter of Netzwerk Steuergerechtigkeit, the estimated impact from dirty money in London is 20% of the price increases. …

Laundering money through real estate is far from new, but the velocity and volume is. Traditionally, launderers would buy, hold, and sometimes even rent the places out. The lack of scrutiny in real estate transactions, has always made it a prime landing spot. Every city has a few well known families connected to local mobs, that just happen to be in real estate. The impact to home prices are minimal when the volume is low and slow.

The recent boom in real estate prices in Sydney and Melbourne was partly driven by laundering money that was escaping China.

While money laundering can accelerate the boom to crazy levels, the main causes of rising real estate prices are of course:

  1. The undersupply of land due to zoning restrictions. Due to government. Witness the much lower prices in US cities that have little regulation, versus high prices in tightly regulated cities.
  2. The oversupply of money. Due to government — which sets interest rates and money supply via the central banks. Most anyone can borrow obscene amounts of money at low interest rates.

The sad result of all this criminal and government activity is that the western middle class works crazy hard to bid against each other for a limited amount of desirable real estate. Imagine how much easier life would be if houses cost what they did in our parent’s day, about three times annual earnings?