That’ll Kill the High-End Housing Boom in US Trophy Cities

High-end American homes are hot among foreign investors. Last year, the Association of Realtors reported that they spent $92.2 billion on US homes over a 12-month period, up 35% from a year earlier. Chinese investors spent $22 billion, up 72%, paying a median price of $523,000. And 76% of them paid cash. They’re desperate to get their money out of China!

Yet with all the official vigilance and handwringing in the US about money laundering and the crackdown on Americans trying to stash some money overseas to escape the sinewy arm of US tax authorities, no one in America apparently asks foreigners where this money comes from.

Other trophy cities where rich foreigners from corrupt countries like to buy are Washington DC, Miami, and New York. Last month, the New York Times ran a series of articles on how foreigners, particularly rich Russians, hide behind shell companies to buy high-dollar condos at the Time Warner Center and elsewhere in Manhattan:

In the decade and a half since Mr. Putin came to power, Russians have socked away hundreds of billions of dollars overseas. Even as the Kremlin was promoting what it called a “deoffshorization” campaign to repatriate Russian capital, an estimated $150 billion left the country last year….

For many wealthy Russians, a New York condo serves as a double parachute – a safe-deposit box of sorts, and a soft landing spot should the climate back home turn inhospitable or dangerous – even if that apartment sits dark and vacant for most of the year. In the process, the Russians, while not quite as ubiquitous as they are in, say, some of the tonier districts of London, have become the face of a sharpening debate about the impact of New York’s pied-à-terre economy.

Michael Bloomberg, when he was still mayor of New York City, said in an interview that these rich foreigners were “a godsend” to the city’s economy. “Wouldn’t it be great if we could get all the Russian billionaires to move here?” the billionaire said.

But it’s a murky business.

Now Global Financial Integrity, a Washington DC non-profit, and 16 other groups sent a joint letter to the Treasury Department’s Financial Crimes Enforcement Network. It spells out just how murky this business is – and how easy it is to “spend millions of dollars” anonymously in deals that are eagerly “facilitated” by the US real estate industry:

Investors mask the true ownership of property in the United States through anonymous companies. The effects of such companies go far beyond hiding the ultimate owners of Manhattan’s real estate. Anonymous companies allow corrupt politicians and organized crime to transfer and hide illicitly acquired funds worldwide, and fuel an abuse of power and a culture of impunity. The ability to conceal their illicitly-obtained-gains fuels corruption, breeds instability, and diverts resources from those they should benefit.

The letter laments “the lack of due diligence by the real estate industry into buyers’ identities, backgrounds, or the sources of their funds.” It refers to a report by the Senate Permanent Sub-Committee on Investigations in 2010 that showed “how foreign kleptocrats and their close associates were undermining US anti-money laundering controls….”

How can this happen on this scale in the anti-money-laundering capital of the world?

Turns out, buying a home in the US with laundered money is OK for foreigners. But don’t try to do this if  you’re American. And that’s on purpose, thanks to the most un-American, big-brother, insidiously misnamed law that just doesn’t stop giving: the Patriot Act. The New York Times explains:

As signed into law in 2001, the Patriot Act would have required real estate brokers and others involved in real estate closings and settlements to conduct due diligence checks on their customers. After heavy lobbying by the industry, the industry was exempted from the final regulations.

This “temporary” exemption for foreigners, handed to the real estate industry in 2002, is now under fire. In their letter to the Treasury’s Financial Crimes unit, the 17 groups are asking that this exemption be yanked, that real estate professionals and banks be required to perform due diligence on these foreign buyers – just like they already have to with American buyers. Why should foreign buyers go scot-free?

Alas, I can already hear the howling from the real estate industry.

In California, selling high-end homes to Chinese investors is a huge business. An entire industry has sprung up to bring in Chinese buyers. It starts with marketing in China and extends to Mandarin-speaking real estate agents who cater to this clientele and create a relationship of trust. They show the most suitable homes. They steer buyers from new homes to existing homes when new-home prices outrun those of existing homes. They sort through the complications of buying a home in the US. They’re helpful in a million ways throughout the process.

These realtors don’t want to ask any questions. They want to sell a home, collect their hefty commission, and use world-of-mouth to attract more business from China.

And what would happen to high-end home sales and prices if buyers from China, Russia, the Middle East, Argentina, or even Venezuela were suddenly forced to lift the veil of their shell companies and disclose who they are, how they got their money, and prove that it hadn’t been obtained illicitly and through corrupt practices and subsequently laundered?

Everyone knows what would happen: These folks would go to London or other off-shore havens where none of these pesky questions would crop up. Sales of these high-end homes in Southern California and the Bay Area or in Manhattan would dry up. Prices would plunge. There aren’t enough Americans who can play in this ballgame. And it might just be what would prick the gold-plated end of the new housing bubble.

The housing industry is already fretting about Wall Street firms that have gone on a buying binge that drove up prices over the past three years at the lower end of the housing market. They’re now the largest landlords in the US. But now these PE firms want to exit. Read…  Cashing Out of the “Bet on America” Might Get Messy

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  15 comments for “That’ll Kill the High-End Housing Boom in US Trophy Cities

  1. Michael Gorback says:

    I understand the desire to be able to follow the money, but it seems that a private law abiding citizen no longer enjoys any financial privacy. Your bank is a government spy that reports your cash transactions. You can’t own property without a background check. Owning foreign assets is like writing “audit me” on your 1040 and requesting an investigation by Homeland Security. No matter where you live on this planet or where you make your money the US government feels entitled to a piece of your income.

    • Phil Collins says:

      It has killed capitalism. Who wants to do deals when you get continually harassed by the state. But they claim it’s only the big guys. I have heard they are tracing transfers of as little as 3000.

      • Non-Entrepreneur says:

        And that is exactly why I keep pushing off the urge to get a product prototyped and start a business.

    • Petunia says:

      The US govt bent over backwards to avoid seeing the money laundering being done thru the casinos in Macau. It was so much the Chinese govt finally had to put a stop to it. Most of the money seemed to fuel the real estate boom in all the pricey areas in the West. The US govt doesn’t mind money laundering when the money is flowing to the US.

  2. Vespa P200E says:

    The “outside” money from perhaps dubious sources bidding the high-end housing reminds me of the Japanese buying up the storm in US RE including the fabled Rockefeller Center heralding in the peak or the bubble about to be popped.

    This is classic case of the blind and misguided case of the greater fool theory just when Middle East/Russian money may be under fire due to oil price and Chinese money spigot may trickle once the mainland RE bubble is popped. It kind a sucks when one has to liquidate their RE holdings in US to prop up other holdings back home.

    • Michael Gorback says:

      Yep. Back then everyone was distraught that Japan was buying us out. I kept telling them it was the smart money selling to the dumb money.

  3. Mary says:

    I have a friend in real estate who does business in Pasadena, CA and related communities that are favorites with Chinese buyers. She is very funny on the issue of lucky versus unlucky numbers in street addresses. Realtors will actually advise owners of high end properties to figure out some way of eliminating 4 from an address and adding as many 8s as possible.

    • Vespa P200E says:

      I lived in Irvine AKA Caucasia in the mid to late 90’s. I recall seeing a tour bus full of Taiwanese (not so many mainlanders 20 yrs ago) who paraded thru the model homes at 2 Std Pacific and 2 Cal Pacific in Westpark II development. I think it was a ploy to have the tour bus take a side trip probably paid by local RE Chinese agents as the sales people at the development I was living at said they too were surprised. The rage back then was fad superstitious fengshui BS where the staircase cannot be in front of the front door and other moronic thoughts and 4 vs. 8 #s.

      New development I moved into also offered “Chinese kitchen” option with restaurant quality gas ranges with very high heat output and kitchen vent placed lower above the range.

      Anyway – let ’em come and scoop it up at the tail end of the yet another housing bubble.

  4. Petunia says:

    I don’t care that foreigners are buying up all the high end real estate, they will take a beating eventually. The real problem is that they don’t live in the properties and the cities don’t benefit from having high income residents. The owners don’t eat out or shop in the areas where they invest and it hurts the businesses in those neighborhoods. Downtown Miami is a ghost town after 6 p.m. and not much better during the day.

    I saw a tv show last year about the empty mansions in London’s priciest area, the homes looked abandoned.

    • Michael Gorback says:

      Oh no! China is exporting ghost cities! ;-)

      • Vespa P200E says:

        Modern day “build and they will come” as place to park the money thanks to global ZIRP which is turning into NEGative interest rate policy further pumping the bond, equity and RE balloons with money literally looking for “home”.

  5. Julian the Apostate says:

    For some reason I’m reminded of a very old joke. A woman answers her door to a Western Union delivery boy with a telegram for her. “Oh, is it a singing telegram?” she asks. “No, just a regular one” said the boy. “Well, I’ve always wanted to get a singing telegram. Won’t you PLEASE sing it to me?” Looking dubious the boy clears his throat and sings “Fred and the kids are dead! Stop”

  6. Stavros h says:

    Russia’s alleged “capital flight” is mostly the paying down of debt by Russian corporations to Western financial institutions. Secondly, around twenty billion dollars are sent by immigrant workers back to their home counties. Only a small percentage of the total reported capital flight is actually that.

  7. SteveK9 says:

    Chinese buying is a big part of what keeps the Toronto housing market high. I speak from personal experience. Working in Toronto and renting a room in a housing development with giant $1M houses that are spaced about 4 feet apart. From the immediate neighbors and the kids at the bus stop you would think you were living in Shanghai.

  8. Maximiliano says:

    I doubt this will ever happen in Miami, even if it becomes law. The law in Miami is just considered a mild suggestion. 90% of new condo sales, completed or pre-construction, are foreign and cash. Just look anywhere in town within two miles of the water, a sea of cranes. And don’t even ask about planned and proposed, it’s mind blowing. Brickell in particular makes all previous booms look like a joke, and the Design District just north of downtown which is basically Rodeo Drive built overnight out of a razed ghetto, it’s all dependent on this pure cash money inflow continuing. It’s a surreal feeling that you know is far removed from common sense but as we say, that’s Miami. Nothing’s real. You think the shamble houses stuffed with Hatians, or the crackheads and hookers on the street corners just two blocks west are going to shop there? Buy these condos? Eat and drink and the gazillion restaurants where a tab for two easily is $200? Because that’s all Miami is, the incredible glitz of the beach and Bayfront, and a poor ghetto. Zero middle class. CA, NYC, DC top end can correct sharply but not utterly crater the place if this money dries up as they have fairly diversified economies. This (and tourism) is ALL Miami has (and of course I include drug trafficking with the illicit cash). It’ll bust alright as it always does but not because anyone here will ask ‘official’ questions, that is, actually participate in killing the goose.

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