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Laundering money through home ownership hurts everyone

Image: Flickr/mlhradio

House prices usually depend on a variety of factors, starting with location and the general economy. Take our house. We chose the neighbourhood  for access to the best public elementary school in town, and our house has more than tripled in value.

Mind you, Calgary has more than doubled in size since I arrived here in 1968, from 650,000 people (mostly white) to more than 1.25 million people from a wide diversity of backgrounds. With that growth came higher real estate values.

While a house is the biggest purchase most people ever make, buying a house is always a gamble. Calgary housing markets go up and down fairly often, according to oil prices and energy policies. We bought because we wanted to live in that neighbourhood, and not as an investment, but we were lucky that our gamble paid off.

After tripling in value over a couple of decades, last year our estimated house price dropped significantly, because of external factors: oil prices are down and our neighbourhood is about to become a residential island surrounded by construction on three sides, as the hospital and university both expand.

Calgary is a relatively young city (founded in 1875), which may account for some of the real estate fluctuations. Even older cities usually see some housing price changes though, as neighbourhoods fall in and out of favour, and as downtown workers opt for three-hour commutes rather than studio apartments.

In a few older cities, real estate and rental prices have nowhere to go but up. Manhattan is on an island.  Development in London (UK) is restricted by reclaimed historical ruins that limit what can be built on prime real estate. A few years ago, a London broom closet sold as a condo for $100,000. Talk about a pied-a-terre!

Then there’s Vancouver, and more recently, Toronto, where a small bungalow fixer-upper in the east-end Greek Town neighbourhood recently sold for more than $1,000,000.

"Multiple bidders competed for the tear-down on a tiny lot measuring 20 feet wide by 78 feet deep. The winning bid emerged 54 per cent above the list price and caught industry observers by surprise -- $370,100 higher than the asking price," according to the Globe and Mail.

Essentially, somebody paid a million dollars for a 1560-square-foot patch of land near Toronto’s Bloor-Danforth subway line. You know what they say about land -- they're not making any more of it. Safest investment you can make. Safe as houses, eh?  Well, with a few exceptions.

– Except that with a fiver-per-cent mortgage, somebody would be paying about $3,500 a month for that patch of land -- and presumably repairing the existing bungalow in between the three jobs they need to meet the mortgages.  

– Except that the 2008 financial crash proved real estate values and mortgages to be illusory. Millions of over-extended Americans lost their over-leveraged homes because over-enthusiastic banks coaxed and pressured people into sub-prime mortgages they really couldn't afford in the first place.  

– Except that Canada has converted to a low-wage service economy, and more and more often, service sector workers can't afford to live anywhere near where they work -- which hurts businesses as well as workers.

The idea of owning land -- "real" property -- is dazzling enough to overshadow what has been happening with Vancouver and Toronto real estate. Land is very real, tangible, and immovable.  

Let's follow the money instead. Money exists mainly on paper and in people's digital accounts. In the virtual world, the same piece of land can be bought and sold several times, in a process called “shadow flipping,” before its final buyer pays for all the profit-taking in between.  

Let's say a homeowner puts their home up for sale at $800,000. A shell company may buy the house for that sum, even before the listing goes public, and then sell ("flip") it to another shell company for $50,000 more. There may be two or three more flips before a realtor finally lists the house for sale on the open market -- at $1,000,000, or $200,000 more than the homeowner received.

"Why would anybody agree to do that?" was my first response, followed quickly by, "Is it legal?" According to a recent Transparency International report, the purpose is to launder illicit revenue by pouring it back and forth between shell companies in repeated purchases.

Unfortunately, laws restricting the practice are unenforceable, because in Canada, shell companies are particularly hard to trace. For example, governments can't identify the real owners of almost half of Vancouver’s 100 most expensive homes.
TI’s report, Doors Open Wide, points to money laundering as a key factor in surging real estate markets in four countries: Canada, Australia, the U.K. and the U.S., which lack one or often more internationally recommended pieces of legislation designed to track illicit money.

For example, international money-laundering laws require real estate agents and accountants to report large cash transactions (such as buying a house) to the proper authorities, but a recent Canadian Supreme Court decision means that Canadian lawyers can handle such transactions without having to report them.

Global News reports that the Chinese government has listed Canada as a target region for recovering money gained in China through corruption. The Financial Anti-Laundering Task Force noted Canada is particularly attractive because we have no extradition treaty with China.

Inflated house prices hurt everyone, even the homeowners who profit on paper. Moody’s warns that Canada risks another 2008 housing bubble “correction.”  Public outcry and persistent news media campaigns have led to some new laws, such as the B.C. foreign buyers’ tax, which seems to have halted and reversed the increases. Ontario is considering a similar measure.

Decades ago, the Canada Mortgage and Housing Corporation provided low-interest mortgages to housing co-operatives across Canada. Co-ops in turn provided a check on the free-market rental rates. These days, like-minded people are forming co-housing projects to share resources and offer housing security.

The Ontario Human Rights Commission has said that housing is a basic human right.  Canada and the provinces should enact the 10 laws Transparency International recommends, to ensure that housing serves its purpose -- keeping people warm and safe.

Right now it seems that outsiders are using our housing as piggy banks, which means that great big houses sit empty, while homeless people sleep outside in the cold.  Houses are for shelter, not for hiding the proceeds of corruption. Let's get our priorities straight.

Image: Flickr/mlhradio

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