COLUMN: Anti-money laundering finally targets real estate market
For the first time in history, the federal government will require real estate companies to reveal the identification information of buyers who purchase luxury properties in the United States. According to The New York Times, the Treasury Department announced last Wednesday that it would begin tracking and identifying secret buyers of high-end real estate.
The new rule is the attempt of the federal government to crack down on the increasingly widespread money laundering in the real estate market. Based on current laws, it is legal in the U.S. to purchase luxury properties without revealing buyers’ names. Many secret buyers open shell companies first and then use them to purchase high-end properties as a way to cover their real identity. The New York Times initiated an investigation and found that almost half of sales more than $5 million were to shell companies since 2000. They published a map showing locations of the density of luxury properties sales around the nation. New York City and Miami, which are among the largest markets of high-end properties, will become the first places where the new federal rule will be enforced.
The new policy may create ripples in the real estate markets that have benefited tremendously from secret buyers around the world who pay cash through shell companies. As the pace of economic expansion gets faster, the real estate markets and construction also experience a fast-growing boom. Many metropolitan areas have at least witnessed strong growth of new home construction and prices from last year, if not completely recovered from the great recession. Clear Capital, as real estate data provide, shows that the Bay area in California, Washington, D.C., New York City and Florida have the nation’s highest median of housing sale prices. The New York Times investigation indicated that those areas are the favorite places for secret buyers to settle enormous amounts of money.
More or less, money from secret foreign buyers nevertheless has pushed up the median prices in the housing market, creating an artificial boom and attracting more hot money to flow into those areas. However, the real estate market is one of the markets where bubbles easily proliferate and burst. If secret buyers use real estate markets as a way of laundering money, the velocity of money in the market will be high. They could use cash to purchase a luxury property at first, and wait for a couple years then sell it. In this way, the money immediately becomes clean, and the economic crime of money laundering will be impossible to track.
A housing market with a bubble growing fast is neither a contributor for a stable macroeconomy, nor a sign of economic justice. Canada’s economy in recent years is a case in point. According to Financial Times, foreign buyers drove up Canada’s housing market significantly in the past couple years, especially in the Vancouver and Toronto areas. The average prices of residential properties in Vancouver rose 11.23 percent from 2014 to 2015. The price of a detached home reached C$ 1.4 million, thanks to foreign buyers and immigrants from China and Hong Kong. Yet the booming housing market does not help Canada’s economy. With declining prices of oil and other commodities, Canada’s economy experienced modest contraction during the first half of 2015.
The Bank of Canada closely monitored the housing market and household debt level. It may intervene with monetary policy in the market if necessary. In a market with too many loopholes, economic policy is not enough. Monetary policy might curb the rising house debt issue, ending easy credit. But if there are too many secret foreign buyers, economic policy will not stop them from investing because foreign buyers are abundant with cash and liquidity.
This is why the U.S. Treasury Department’s new regulation is on the right track with easing the housing market. Under the Patriot Act, the Treasury Department has the authority to scrutinize real estate buyers and require companies to disclose information. But in the past, the Treasury faced strong opposition from lobbying to issues such as regulation. Now it has to take a bold step ahead in fighting economic crime.