Real estate affordability is the latest crisis foreign buyers are being blamed for. Long the target of governments and regulatory bodies, Canadian Prime Minister Justin Trudeau is proposing the most radical solution to foreign buyers yet: ban them altogether for two years. The move could also help fight one of the most common forms of money laundering. That’s why it will never happen.
“You shouldn’t lose a bidding war on your home to speculators. It’s time for things to change,” Trudeau said on the campaign trail in his bid for reelection, according to Bloomberg. “No more foreign wealth being parked in homes that people should be living in.”
Foreign buyers have been active in Canada, where buyers primarily from Mainland China and Hong Kong have pushed up the price of a home in Canada by 16 percent in just one year. The Canadian Real Estate Association’s (CREA) home price index is up 69.7 percent since November 2015, when Trudeau first took office. The problem extends south, where foreign buyers purchased $54.4 billion worth of homes in the United States in the last 12 months, helping to drive the average price of a home up 15 percent, according to NAR. The problem, as PM Trudeau spoke to, is foreign buyers are not likely to live in the home they purchased. Numbers are notoriously hard to track, but in the United States, only 43 percent of foreign buyers purchased the property as a primary residence. That means the majority of foreign buyers are using property in the United States and Canada as a place to park money. It’s more nefarious than it seems and has long been the target of regulatory ire. Affordability is a new wrinkle in a problem no one is eager to solve.
Trudeau’s statements are the latest attempt in a long line of efforts to tackle the problem of foreign buyers. Back in 2017, Vancouver implemented a tax on homes left vacant for more than six months a year, subjecting the asset to an annual for equal to one percent of the property’s assessed value. Vancouver’s vacant homes tax has since tripled. Washington D.C. has a variation on the tax, assessing the tax at $5.00 per $100 of assessed value. Oakland recently passed its own vacant home law, charging a $6,000 flat fee. Other California cities, like San Diego, San Francisco, and Los Angeles, are considering following suit. Some cities, like New York, are even considering taxing vacant rental units as a way to force landlords to fill units by lowering the rent. There’s little evidence to show any of the solutions will solve the affordability or money laundering issues inherent in foreign buyers.
In Vancouver, the local government has made more in tax revenue than expected, but nothing has changed about the housing market. Prices continue to rise and vacancy has stayed at one percent, according to Bloomberg reporting. Paris enacted a vacancy tax in 2015, assessing 20 percent of the market value of rent, tripling the tax to 60 percnet in 2017, and still, Paris’ housing problems persist. Then there’s the problem of scale. Foreign buyers may own pricey real estate, but they don’t own much of it. Foreigner buyers represent less than three percent of property owners in the United States and less than one percent in Canada. Blaming foreign buyers for an affordability crisis when they control so little of the housing stock doesn’t make much sense. Speculation is likely playing some part in driving housing prices ever higher, but only a small fraction of that speculation is foreign. More than anything, blaming foreign buyers is likely political posturing against a scapegoat that can’t fight, or vote, back.
Foreign buyers in Canada are being blamed for exacerbating the housing crisis. In the United States, charges against foreign buyers are far more serious. U.S. real estate has been one of the most popular forms of money laundering for decades. Cash is used to purchase homes, condos, or other forms of real estate. When that property is re-sold, the initial capital investment becomes legal gains. The only hard part is obfuscating the original origin of the money. Nesting dolls of shell companies get set up, transfer cash from one entity to another, often through multiple overseas accounts. Canadian real estate is also a popular way to wash money. Experts have conservatively estimated that $46.7 billion is laundered through Canada each year.
A New York Times Investigation into foreign wealth flowing into New York looked into more than 200 shell companies buying up the city’s priciest residential real estate. It took The Times over a year to get to the bottom of one single building, Time Warner Center, by pouring over the business and court records from more than 20 countries, reviewing hundreds of property records to connect dots from lawyer to lawyer, buyer to buyer. The Times concluded in most cases establishing an origin for the capital used to purchase the property was impossible. Even with 21st-century data, technology, and communications, real estate markets are becoming less transparent, not more, especially in the United States. The non-profit Tax Justice Network ranks the United States as the second-worst offender when it comes to “helping individuals to hide their finances from the rule of law.” Illicit cash is flowing into real estate at such a high rate the U.S. Treasury is getting involved.
The Corporate Transparency Act was recently passed by Congress despite then President Trump’s veto. The law requires true owners of shell companies to identify themselves to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) or face criminal charges. Beneficial owners of the property, defined as a person who has control over the entity, must provide ID information including their name, date of birth, and current address, to be compiled into a database maintained by FinCEN. Changes in ownership must be reported. False information or failure to comply could result in up to two years of prison time. Officials in Canada have pushed for the country to enact similar transparency laws.
Experts say the new legislation lacks the tools to create real change, few mechanisms for enforcement mean the law lacks any teeth. The harsh reality is the real estate industry does not want to solve this problem. “We like the money,” Raymond Baker, the president of Global Financial Integrity, a Washington nonprofit that tracks the illicit flow of money, told The New York Times. “It’s that simple. We like the money that comes into our accounts, and we are not nearly as judgmental about it as we should be.”
Whether through additional taxes or legal fees for more complex shell companies, foreign buyers can simply price the new rules into the cost of doing business. Gains from real estate holdings, especially in Canada and the U.S., will always be attractive to foreign investors. Banning foreign buyers may be a sensible option if you’re serious about solving the issues but doing so would leave billions on the table every year, money no one in their right mind is willing to walk away from.
Foreign buyers may be a small part of the overall real estate industry in both Canada and the U.S., but the money they bring into each economy is significant. Some major part of foreign real estate purchases likely is illicit, but the fact foreign investors want into the North American real estate market is a good thing. Foreign buyers represent a small percentage of the multi-trillion dollar yearly property market in each nation, unable to fundamentally move markets at such a small scale. Foreigners owning luxurious condos they hardly live in may be bad optics, but the state of luxury condos at the most expensive addresses in the country is not indicative of the overall residential property sector.
Ultimately, foreign buyers serve as a convenient political scapegoat. No amount of vacant property taxation is going to solve the affordable housing crisis. Foreign buyers don’t control domestic policy, zoning, or building codes that would actually alleviate housing burdens. Foreign buyers are a faceless boogeyman to blame problems on. Fighting illicit foreign buyers is important to maintaining the health of the property sector and reducing corruption, but it’s not a solution for any serious problem plaguing the property sector. As always, it’s easier to blame someone else when the reality is that the fault is our own.