Last week, a panel of three academics established by British Columbia’s Minister of Finance released a report exploring the role that money laundering played the province’s real estate market.
The report found that money laundering had likely inflated B.C. housing prices by five per cent.
The 184-page report details the methods and assumptions used to estimate the amount of money laundered in Canada and then further determines the amount laundered through real estate in B.C. In so doing, the report relies heavily on previous research on money laundering from other jurisdictions.
The report does not identify a single laundered dollar or an account with laundered money or even a single purchase of property using ill-gotten wealth. So how did the report come up with $7.4 billion in laundered money in B.C., of which it estimated $5.3 billion made it into real estate?
The report primarily relied on previous international estimates that stated that roughly two to five per cent of global GDP comprised laundered money. It assumed that the flow of ill-gotten wealth to Canada from other countries depends upon the attractiveness of the host country and the cultural affinity it may have with a source country.
Furthermore, the report relies on a global database of crimes per country and estimates of the “amount of money that needs to be laundered per crime” generated by an Australian expert in 1995 to come up with the $7.4 billion figure for laundered money in B.C. in 2018.
The report identified some unusual suspects for inflows of laundered money to Canada. The bulk of the estimated inflows to Canada originated in the U.S. followed by Northern Europe and Western Europe respectively. Estimates of inflows from Eastern Asia, including China, totalled only $0.8 billion in 2015.
Essentially, the amount of laundered money from foreign and domestic sources engaged in criminal activity ends up being roughly two per cent of Canada’s or provincial GDP. Hence, estimates of money laundering are larger for more populous provinces with larger GDP. However, the estimate for Alberta was disproportionately higher and that for Ontario was lower as a fraction of their respective GDPs.
The relationship between laundered funds and real estate appears even more tenuous. The report assumes that if each dollar of the $7.4 billion estimated for money laundering is invested, as opposed to consumed for other purposes, and that 72 per cent of the portfolio is invested in real estate, the amount laundered through real estate would be $5.3 billion. Under revised assumptions, estimates for money laundered through real estate were as low as $0.8 billion.
Thus, when the panel estimated that housing prices in B.C. were five per cent higher because of money laundering, the panel relied on the upper limit estimate of $5.3 billion. Had it used the lower limit of $0.8 billion, it would have found a much lower impact.
The report is not without caveats about the uncertainties in generating the reported estimates. It warns that “after making a large number of assumptions, the panel’s best estimate is that the effect of money laundering is to make house prices in B.C. 3.7 per cent to 7.5 per cent higher than they would be in the absence of all money laundering.”
The report carries an informative appendix by Professor Tsur Somerville of the University of British Columbia that offers evidence of suspected activities in the B.C. housing markets. He analyzed categories of suspect real estate transactions including those that involved ownership by “legal persons” (legal firms, businesses) as opposed to “natural persons,” properties owned by foreign nationals or those owned without a mortgage or financed by unregulated lenders.
Professor Somerville’s tabulations revealed that the share of “suspicious” real estate transactions was much higher in Whistler, where a significant fraction of homes (especially condominiums) was owned by foreign nationals and legal persons.
The report also found that over 40 per cent of the residential properties in B.C. were owned without a mortgage. However, this is no different from other jurisdictions in Canada. Furthermore, the report noted that most owners of a principal residence without a mortgage were seniors, “suggesting a large number of downsizers purchasing with wealth” and hence not criminally motivated.
The report highlighted several indicators of suspicious transactions, such as mortgages from unregulated lenders being more common for high-value properties. Similarly, the share of suspicious transactions was higher for properties transacting in 2018 than before.
But are these statistics sufficient proof of wrongdoing?
The report warns against rushing to a conclusion. “The nature of money laundering is such that simple cross-tabulations cannot determine whether a property was purchased with dirty money or not,” the report cautioned.
When it comes to money laundering, the known unknowns are many.
“The proportion of funds from local sources and inflows is unknown. The behaviour of criminals in terms of choosing to use these flows for consumption and investment is unknown. To the extent that the funds are invested, the portfolio allocation behaviour of criminals is unknown and whether or not it is the same for two types of flows is unknown.”
With such warnings about “considerable margins of errors” “where any effort to predict the volume of money laundering in real estate is compounding uncertainty with uncertainty,” it will be prudent not to blame the affordability challenges solely on foreigners or money laundering.
Even if the report’s findings that the estimated impact of money laundering “would be to increase housing prices by about five per cent,” is taken at face value, it still does not explain the other factors that caused single-family houses in Vancouver to appreciate annually by 30 per cent.
The report’s recommendations for greater transparency in property and land ownership and co-ordinated oversight of financial transactions by various governments are necessary to move from estimates to hard evidence of money laundering.
Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.
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