The Housing Bubble

Continuing a discussion on the role of money-laundering and the housing bubble. LA Biz Journal. “Economists at UCLA Anderson School of Management foresee healthy growth for the nation’s economy over the next two years, but California will likely experience a slowdown in employment growth. In another essay, Economist William Yu looks at the turmoil in China’s economy and the potential implications for Los Angeles’ economy. Yu says that China’s economy is more volatile than suggested by official numbers and its economy, housing market, stock market, and currency are all in trouble.”

“The implication for Los Angeles is that China’s turmoil might reduce the growth of Los Angeles’ exports and tourism, but Chinese investment in Los Angeles real estate will persist due to better and safer expected returns in the U.S., Yu says. However, Los Angeles’ housing market, despite becoming more expensive and unaffordable, is not in a bubble and its housing prices are highly unlikely to bust this year or next.”

From CNBC. “The address 520 Park Ave. is still mostly a hole in the ground, but the sales office is now open for business and redefining the luxury price point in New York City. Luxury condominium prices already hit a record this year, according to several report on the Manhattan market. This as more units go up, but global financial markets fall. ‘Everything concerns me, but, very funny, we think we’ve seen more Chinese buyers in the last 60 days than ever before,’ said William Lie Zeckendorf, the developer behind 520 Park. ‘I think, frankly, what’s unsettled China has made the U.S. that much more appealing.’”

“‘Probably more likely now than ever. We are seeing more and more interest in New York City from across the world, we’re also seeing record-breaking prices being paid by New Yorkers,’ said Zeckendorf, who claims that the majority of his buyers are still from the tri-state area.”

“In the new development market, the price per square foot reached a record, up nearly 17 percent from a year ago, and sales surged 61 percent. ‘The sky is the limit. I was once asked could we exceed a hundred million and I think we can keep on going up,’ said Wendy Sarasohn, a real estate agent with Brown Harris Stevens in Manhattan, adding, ‘My prime buyers are from the metropolitan tri-state area, California and then international buyers.’”

From Realty Today. “‘Everything is selling fast, I don’t see how there could be a bubble. I think to some degree real estate follows the stock market, but people buy real estate to live in also, not just to invest in,’ said Howard Lorber, chairman of Douglas Elliman.”

“Also, foreign investors are still continuing to flock in Manhattan and occupy its real estate properties. One example of strong foreign investors are the Chinese. Lorber said. ‘When the Chinese stock market went down, when their real estate market went down, that didn’t stop them from buying here. It actually made them more interested in getting their money out of there and buying in New York City.’”

From Forbes. “With the crisis in Ukraine growing, it does seem that Russian investors are trying to extend their reach into many properties of London. It appears that one reason for this interest is an attempt to avoid heavy taxation on their assets by extending them overseas to London where they can invest in properties. It is projected that this new Russian invasion could last for quite a while as the flight from Russia of major investors is expected to increase over the next few years.”

“In an interesting turn of events, a London home right next to 221B Baker Street was used to launder what was estimated to be over $200 million in wrongly acquired cash. If the address sounds familiar, it was the one used for the address of literature’s most famous detective, Sherlock Holmes. In fact, the actual Baker Street address as well as much of the surrounding property was owned by someone linked to Rakhat Aliyev who is a notorious international money launderer.”

“His presence in the London area for years is an indication of foreign money being laundered in the billions of dollars which in some cases may have been turned into investment capital. A large influx of questionable money that is now thoroughly mixed with good money has managed to pump up the London property markets to the point where it is very difficult for common residents of the city to find affordable housing.”

“What’s even more interesting is that there are vast luxury apartment blocks that are mostly empty as a result. It is estimated that upwards of 75% of the new apartment blocks are totally unoccupied and that it is simply acting as a hiding place for all sorts of dirty money, money launderers, tax dodgers and even drug dealers which has helped to create an artificial residential shortage in luxury apartments.”

“It is this influx of money and new properties which is fueling further investments in new properties that will arguably sit mostly empty as well that is pushing upwards the housing bubble by creating a lack of proper housing in the city.”

The Financial Post. “A recent report by Washington think tank Global Financial Integrity reveals the fatal flaw in the world’s globalized financial architecture: It has not been accompanied by a globalized governance and regulation system. The failure to apply controls across the global economy represents a serious threat to all and is quantified in the report, sponsored by the Ford Foundation, entitled ‘Illicit Financial Flows: The Most Damaging Economic Condition Facing the Developing World.’”

“I have written extensively about the fact that Toronto and Vancouver condo markets are driven by hot money flows, that have increased housing prices for all residents to excessive levels. The same has happened in London, Sydney, Melbourne, New York and Miami.”

“In Canada, banks operating in Hong Kong. London and tax havens facilitate flows out of China and elsewhere. Compounding this is the fact that our governments — like those in Europe and the U.S. — represent gigantic secrecy havens because they don’t require disclosure of beneficial ownership.”

“The U.S. and Europe are studying laws to publish central registries of beneficial owners for public and/or law enforcement access. The G20 and G7 have each paid lip service to cracking down on tax havens but nothing substantive has occurred.”

“‘There remain powerful segments of 
the business community that want to retain abusive transfer pricing as a mechanism for shifting revenues across borders’ wrote GFI’s founder Raymond Baker ‘and some actors in the banking community that want to continue accepting suspect deposits out of other countries via weak legislation and enforcement.’”

From The Speaker. “Mansion owners in Vancouver are claiming poverty at the same levels as those suffered by the city’s homeless struggling in the Downtown Eastside. A recent study by University of B.C. geographer Dan Hiebert has revealed that wealthy business-investor immigrants to Canada — hundreds of thousands of whom have chosen to relocate to Vancouver — are ‘poor’ enough to receive social welfare.”

“The neighborhoods that report the most poverty, according to Hiebert’s report, which is based on Statistics Canada data, are the upscale Metro neighborhoods with high proportions of immigrants — mostly Chinese. In these areas over 30 percent of adults claim poverty. The houses in these areas, including Shaughnessy-Arbutus, south of Oakridge Shopping Center, and north-central Richmond — sell in the range of $2 million to $6 million Canadian.”

“Several north Richmond neighborhoods are ‘low-income’ according to tax stats. These neighborhoods are also approximately 60 percent Chinese. Hiebert’s data echoes another recent study conducted by Vancouver mathematician Jens Von Bergmann which found that 1 in 10 households declare less income than they spent on housing costs — mostly in Vancouver’s West Side.”

“Canada’s business investor program allowed foreign nationals to obtain a Canadian passport in exchange for a temporary investment of $800,000 Canadian — an amount much lower than similar programs in other countries popular with wealthy immigrants. The program was cancelled last year but the Quebec business investor program remains in use, allowing thousands to land in Quebec before relocating to Vancouver.”

“Just those immigrants who have relocated to Vancouver (current population under 2.5 million for Greater Vancouver Area) using this program amount to approximately 200,000 in the last generation. However, the number of new immigrants to Vancouver is estimated to be over 30,000 per year.”

“Critics such as Immigration Watch Canada’s Dan Murray have pointed out the political nature of the problem. Despite the breadth of the issue and the cost to Canadian taxpayers, no Canadian political party has said a word about it, despite the current federal election.”

“‘So far, none of our five major political parties has even uttered a peep about this matter,’ Murray told The Speaker. ‘The point is that several million immigrants — particularly hundreds of thousands of Investor Immigrants — have been taking huge amounts of economic and social benefits from Canada, but have been contributing next to nothing. And they have been getting away with it because the Canada Revenue Agency has not pursued these hundreds of thousands or millions of cheats.’”