Stop money laundering so our kids can buy homes

By Leith van Onselen

Fairfax’s Michael West has called on the federal government to tighten Australia’s anti-money laundering rules in a bid to cool Chinese money flows into Australian real estate:

That an entire generation of young Australians has been shut out of the Melbourne and Sydney property markets is bad enough. When you consider though that a solution to the problem of housing affordability is staring policy-makers straight in the face, it is a blatant failure of government…

All the government has to do is to bring in the AML legislation it said it would bring in almost 10 years ago and the heat, or at least some of the heat, would come out of the market…

How big is this market, and how much black money are we talking about here?

Credit Suisse estimates some $28 billion of Chinese money has been invested in the Australian housing market over the past six years. Assuming – and there is no way to put an accurate number on this – that half of that $28 billion is black money, then that’s $14 billion of Chinese money inflating Australian house prices…

Assuming the Credit Suisse estimates are correct and some $60 billion in new Chinese investment floods into Australian housing over the next six years, and assuming that half of that is black money, that’s $30 billion in black money which will keep prices inflated over the coming six years.

It is worth pointing out that the Paris-Based Financial Action Task Force (FATF) on money laundering in April released its report on Australia, which found that Australian residential property is a haven for international money laundering, particularly from China. The report also recommended that Australia implement counter-measures to ensure that real estate agents, lawyers and accountants facilitating real estate transactions are captured by the regulatory net [my emphasis]:

Australia remains at significant risk of an inflow of illicit funds from persons in foreign countries who find Australia a suitable place to hold and invest funds, including in real estate…

Large amounts are suspected to be laundered out of China into the Australian real estate market. China and other countries within the Asia-Pacific region were also seen as likely sources of corruption proceeds that are laundered in Australia…

Most DNFBPs, including real estate agents and legal professionals, are also not subject to AML/CTF controls or suspicious transaction reporting obligations, even though they are highlighted as being high-risk for ML activities…

The authorities should place more emphasis on pursuing ML investigations and prosecutions at the federal as well at the State/Territory level.

That’s a damning critique of the blind eye Australian regulators and policy makers have shown towards illegal foreign investment into Australian housing. The draft rules on anti-money laundering affecting real estate were released in 2007, but have been all but ignored by the federal government ever since. In the meantime, dodgy Chinese money has been allowed to price young Australians out of home ownership, assisted of course by egregious tax policies (e.g. negative gearing), the immigration ponzi, and planning bottlenecks.

Tightening Australia’s anti-money laundering rules also makes perfect macro-economic sense, since it would take the heat out of housing, lower financial stability risks, and allow the RBA to lower interest rates further than would otherwise be possible, putting downward pressure on the dollar. As noted by Michael West:

…record low rates, record high property prices, record household debt to income levels (150 per cent plus) and banks lending at 95 per cent loan-to-valuation ratios is potentially catastrophic – especially in the event that unemployment rises. So why is the government dithering on AML?

About the only positive to come out of the FATF’s report is that it adds impetus to the O’Dwyer Inquiry’s efforts to bolster the supervision/enforcement of Australia’s foreign ownership rules.

However, it is yet another example of government action being too little, too late.

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Unconventional Economist
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Comments

  1. Before we even get to that, we already have laws forbidding sale of existing real estate to foreigners. Simple. #NoPassportNoSale

    • FF

      Too simplistic. Laws allow foreign purchases for new and to be constructed property.

      • Forrest GumpMEMBER

        Too Easy!

        I rented an apartment in East Perth from a great landlord of whom we became really good friends.
        He phoned me one day (around 4 years ago) and said that he’s sold the apartment to a Chinese Investor. An agent came on behalf of the Chinese investor who is not a resident and lives in China.

        The sale transaction went like this:
        The Chinese Investor’s 23 year old daughter was studying at UWA and has a student visa.
        She was the one that (using daddy’s money) bought the property CA$H.
        Dad came over the week after settlement (He bought it sight unseen)
        4 years on, she is still on a student visa and now rents the apartment out.

        Too easy.

      • @FG

        No this is not legal because I remember temporary residents can only buy established properties for primary residence only. that means they cannot rent it our (as investment purpose)

    • wasabinatorMEMBER

      They skirt around that law far too easily. They either use a relative or a corporation to make the purchases as a proxy.

      • I am a lazy engineer who believes in making things simple and the 80/20 rule. The #NoPassportNoSale is a simple 80/20 concept. The money laundering rules will help enhance this further.

      • What FF said, go for the low hanging fruit first before worrying about the more elaborate schemes.

  2. Tiliqua scincoides

    So property prices will continue to defy gravity then?

    I’ve made $200k in less than 12 months by buying in an area with high Chinese demand. Crazy stuff.

    • T you haven’t made it till you sell the property, what then??
      You will pay at least half any gain in tax, then you are back to living in a tent. WW

      • Tiliqua scincoides

        No its my PPR so that won’t apply. I have alternative accommodation options (cough parents) so thinking of cashing out in the next couple of months.

        It’s far from being the best part of Sydney but on the fringe of some highly sought after areas so the growth here has been phenomenal as people are pushed further out. Was at an auction around the corner on the weekend and there were 28 registered bidders. Local agents say they haven’t seen a market like this in 30 or so years (guys I know socially and trust).

        Clearance rates in my suburb have been over 90% all year.

      • outsidetrader

        TS – Are you out in the Hills district by chance?

        Easy to flip properties out there, and you don’t even have to do them up to make a profit – just sit in them and watch the money roll in. Check out this one:

        Buy in Jan 14 for $917: http://www.realestate.com.au/property-house-nsw-west+pennant+hills-115768335

        Sell less than 18 months later (May 2015) for $1.268 million: http://www.realestate.com.au/property-house-nsw-west+pennant+hills-119725523

        And rates are only going to get lower…

      • I saw a program on foxtel (inside china). I think CNBC.

        The rich chinese have sydney and melbourne in their top 10 destinations to live and hold property in.

        Main reasons given were (in no order)…

        Clean air (no pollution)
        Other chinese already there
        English speaking
        Less govt interference (if only they knew)

        On the last point – the Chinese migrants said that in China it’s not your hard work or ability that makes you succeed, but rather who you know and how much the government supports your industry.

        Hmm. Sounds a lot like Australia.

      • Escobar, from speaking to a few young (rich parents I assume) mainlanders recently they think it’s cheap here (compared to HK, etc), the lower dollar is making it cheaper, the recognize that Chinese property could drop 50%, etc, but don’t expect that sort of volatility here.

      • @rich,

        If Chinese money diversifies into an investment class heavily dependent on future Chinese money, it hasn’t actually diversified.

  3. Michael West has been the only commentator in the MSM worth listening to in the last several years.

  4. The Patrician

    Let’s be very clear, O’Dwyer could have recommended
    1. An immediate audit of residential titles records for FIRB compliance….but she didn’t
    2. Proof of purchaser’s FIRB compliant residency status be required for transfer of residential title….but she didn’t.
    The sham continues……

  5. I am in Perth, just had an offer on the family home….. thinking we should rent and wait a couple of years and get back in at a discount… could this backfire? despite all the information available, how risky is this strategy?

    • With property, every way you look there’s risks. What’s your downside if you stay? You’re less rich than you might otherwise be, but you have your home, which I assume you’re happy with. What’s your downside if you pull the trigger? You’re the butt of all your mates’ jokes for the rest of your life and much worse off financially. And for the record I believe property will fall.

      • Indeed! I spent 6 winters in Ireland 2000-2005. Bought first home there, a 1 bedder. Made the foolish mistake of turning it into an IP when I left. Saw it halve in value (and more) 2008-2012. It’s been a screamer since then though. Ireland is a decent bet I think. Wanted to buy another but it was too hard to arrange finance, even with lots of equity in the old place. Was looking to gear the portfolio at 75% LVR and nobody would return my call (tried 3 banks). Banks are shunning all but the very straightforward there at the moment. Can be sure the same would happen in Oz. Something for us crashniks to remember.

    • Mining BoganMEMBER

      That’s what I did and am now living in a lovely, and affordable, rental.

      Life is indeed sweet.

      • Tiliqua scincoides

        I’m thinking of buying a place in Dublin. Chronic shortage of rental properties there at the moment.

        My bro is in London so will fly him over for the weekend to sus it out.

    • Personal opinion from someone who knows nothing: Perth RE prices are going down and are probably going to get hammered over the next couple of years. The prices there are simply way too high even now. If you’ve had a decent offer on your Perth home I think it would be prudent to take it.

      I think the risk is worse if you stay, but it really depends on whether you consider your home an investment or not (I don’t think a single person in Aus doesn’t think of their home as an investment). Downsides are obviously tax and renting. Renting is not so bad if you have a nice lump of cash from selling your home at the right time and an under-supplied rental market driving down prices.

      Consider the alternative risk: paying off a mortgage on a 700k home when it’s now only worth 400k… or whatever your scenario might be, but paying off a debt like that would be soul-crushing.

      I have an Irish friend whose mum bought for €150k in ’03, and by ’07 it was worth €300k. It is now worth €100k and she still has that debt. Do the maths for your circumstances and figure out how it will affect you if the market halves (which it just might in Perth). Is that a risk you can afford?

      Anecdote; i just convinced my parents to sell their house and they got a great price at auction on Sunday. They are very happy and in a whole lot less debt.

      • Also, I don’t think there is much Chinese demand for Perth housing, my take was that it was mostly Sydney/Melbourne. So Perth prices are built purely on mining as far as I can tell.

      • Not sure if this is legal in Australia but the oblivious way to protect yourself is to transfer home ownership to a limited liability entity (obviously one that you control) if keep the LVR as high as possible and remove/ distribute all paper gains than you can just let the limited liability entity die when housing eventually comes back to earth. You keep most of the upside but none of the downside.

    • All good points but don’t forget:
      – There are a lot of friction costs (agents fees, legal fees, moving costs, stamp duty) both ways.
      – Overall, unless you need to move for work, it’s probably nicer to live in your own home.
      – For most people (definitely not for all) the pleasure of being right on your own is not as big as the pain of being wrong on your own.
      – If you have kids, they will not like moving.

      This comes down a lot to personality and stage of life, I think. Also, as noted above, if you’re thinking about your home as your retirement fund, rather than a shelter and place to raise a family, the whole dynamic shifts and it’s purely a money thing, in which case you just have to look at the certain costs vs the uncertain (but much bigger) potential gain and roll the dice.

    • innocent bystander

      so, had an offer without going to market? that is rare. gift horse and all that.
      or you went to market and are now unsure of why you did?

      I am in Perth – sometimes price movements are suburb specific, even street specific; so you need to take that into account if selling. And where to rent? Some parts of Perth are still tricky to find a decent rental.
      Me? Reduced my property exposure by 75% over last few years, and remaining piece of land is more of a lifestyle/part time project – quite prepared o take a capital hit if need be.
      Also, when the SHTF here, and imho it will, you might have an illiquid asset – at any price.

    • To DigDD: I have been a long term investor in Perth real estate, and plan to stay that way. Your scenario of “…get back in at a discount” in a couple of years could seriously backfire. Look at REIWA’s chart of house prices (on their public website) going back 40 years, and you see prices zoom up, go flat, zoom up again, go flat, over and over. They don’t go down much, or for long. The drivers of that pattern (solid resource economy, population growth, high building costs) are not likely to change, certainly not in the next few years. IMHO, hang on to what you’ve got.

      • Why?

        Also REIWA charts seem to be stuck on 550K median with no change for last 6 quarters. Given there was so much volatility in the index prior, I smell something fishy.

      • If the crashniks (such as me) who frequent MB are right, the last 40 years of RE data aren’t going to be all that useful.

    • I’ve briefly wondered the same thing recently but the thought doesn’t last very long. You’re trading one set of risks for another. If you are happy enough for it to ‘backfire’ (prices don’t go down or you can’t buy back in for another reason) then go for it. But if you’re like me and don’t want to pay SD again, have a decent LVR, steady income & love your family home, then there’s probably enough reasons to hold. I figure I’m already 10% through my 25 year loan, may as well stick it out. My income’s rising at the same time my repayments are getting considerably cheaper…. It’s playing out just as my boomer parents said it would! Ha ha.

    • ‘how risky is this strategy?’

      While there seem to be ways to detect when certain asset class is in a bubble, many respected investors have been unable to time when bubbles would pop. (Jeremy Grantham for example shorted Aus economy few years ago.) Just too many variables – interest rates, government interventions, etc.. So market top/bottom fishing – very difficult – and I give this ‘strategy’ 50/50. Having said that I am sure many investors rely on their luck/gut-feel every now and then.

  6. “Credit Suisse estimates some $28 billion of Chinese money has been invested in the Australian housing market over the past six years.”

    Another $60b in next six years.

    I’d be curious to see an article about the increased employment as a result of this in FIRE.

  7. Most people sit around and go well if it’s against the law, and these largely chinese guys are breaking it SO BLATANTLY, why isn’t the Gov doing something about?
    It’s not hard for so called racism to raise it’s head, if a Gov is so pathetic re upholding the law, everyone else is supposed to abide by?

    • There is nothing racist about pointing at an identifiable group of non-citizens blatantly breaking the law and calling them out on it. This is not villification.

      • understand, but do you think the prop council is not calling it ‘racism’ just to help smother the issue.

  8. West is a beacon in the fog but as noted, it’s not just dirty money soiling our future, it’s also capital flight in general for which there are simple but apparently too politically difficult policy solutions at hand.

    Nick Sherry’s well intended and prescient but naive 2010 FIRB legislation (real estate agents, solicitors and others having a vested interest in compliance with the law) has been gamed by State government’s grasping for every bit of stamp duty revenue they can get. Commonwealth leadership is needed. There is none.

  9. Laundering AND rezoning. WW
    Researchers from the University of Queensland found developers at the centre of networks of politicians and bureaucrats were 44 per cent more likely to receive favourable rezoning outcomes.
    Wellvconnected property developers are siphoning off billions of dollars from the public every year though political favours.
    Being on the outside but still connected to those networks gave them a 19 per cent better chance. For those with no connections at all, employing a professional lobbyist was found to increase the likelihood of a favourable rezoning outcome by 44 per cent.
    While UQ researchers Cameron Murray and Paul Frijters, only sampled six rezoned areas, they claim that scaled up to the hundreds of rezoning decisions across Australia this would suggest “many billions of dollars” are regularly being transferred from the general population to connected landowners through political rezoning decisions.
    The process of rezoning “transfers new property rights from the community to specific individuals”. According to the study, rezoning decisions are occurring to the direct benefit of property developers at the expense of the community.

  10. Hmm I’m not blocked, sometimes blocked sometimes not.
    apparently the phrase “Wilderness of mirrors” triggers the block.

  11. So I wonder what would happen if the money was flowing into real estate from the Middle East? Would people start to care? I reckon there’d be a few more checks on the money thats for sure.

  12. Tiliqua scincoides

    Let’s be honest, the government loves the “black money”. They can claim ignorance and the bulk of the voters benefit from it so it’s all good.

      • Annoying Devil

        The old are getting rich, but young men are becoming increasingly restless as they become increasingly dispossessed in their own country. Governments can happily ignore rhetoric until the cows come home, but they fear violence when its directed at them.

  13. Two page feature in the Age on princelings and money laundering this morning – likely to be similar in rest of Fairfax stable I suppose.
    The issue seems to be getting more traction amongst journalists – it’s so blatant and frequent that finding cases to report on is very easy, I guess.
    Just for the sake of getting it out of the papers, its going to be increasingly difficult for the government not to act.

    • The government will continue to do nothing for years yet. There needs to be more people priced out of the market before pressure is brought upon the government to do something. Until then the government will remain silent.

      • Allowing money launderers in is either laziness or means to some end, probably hanging onto power or, based on some of their current government’s work, continuing some ideological war that was relevant when they were at uni, and the rest of country couldn’t give a stuff about.

        Either way, any issue that’s brought up enough can become a nuisance, stopping them from doing what they really want to do. At some nuisance level, it will be worth fixing. We haven’t got there yet, but there is hope that we will get there.

    • StatSailor, could it be that either the Journalists themselves, or (high earning, professional) friends and acquaintances are being directly priced out of areas they would like to live. They could be first time buyers, or looking to move into something better, but the soaring prices has put it out of their reach.

  14. Look at the bigger picture too…Federal investigative agencies are under-resourced and Ministers now rely on their advisors for advice rather than departmental secretaries and if they did, they’re all in Canberra and in la la land anyway. We as a country continue to make laws in the naïve expectation that everybody is honest and then don’t adequately police those laws.

    • “We as a country continue to make laws in the naïve expectation that everybody is honest and then don’t adequately police those laws.” Bingo!

      • Cross-purposes, and delusional, federalism plays a big part in this.

        This is a national demographics & federal revenue structural problem outsourced to the states.

    • Annoying Devil

      There is nothing naive about our laws, they are weak and poorly policed by design.

  15. The amount of hoops you need to jump through for a $1,000 credit card or to place a $10 bet thanks to our AML legislation, but you can buy a $2m property for diddly squat? Something’s not right there.

  16. We tend to pick on the Chinese, but it’s not just the Chinese. Every semi-rich person from UK, US, India, etc can abuse the system. The whole system needs to change because anyone with corrupt funds are able to purchase a VISA here by sending their kids to study, then buy a property…

    • Is the process as lengthy for the money launderers as it was for Steve Wozniak? Seems like screwing around for two years of bureaucracy would put off all but the most dedicated.

    • BubbleyMEMBER

      And its a simple fix on the property documents
      “Are you an Australian resident” Yes/No
      “Passport and or permanent residency check” Yes/No

      No = no sale.

      Simplistic? Yes. Would it work? I think so.

      And none of this student visa bullshit.

    • Mate trust me when I say, every semi rich person in the UK, US and India wants to stay and invest exactly where they are because they are much better off.

      The majority of students from India can barely afford the education here let alone a house. They are coming for a better life. The minority that can, are just here for a few years to let their hair down before taking over dads business. They might buy a holiday apartment on the GC…thats about it.

  17. Mr Market Maker

    All the actions or lack of actions that the government have taken seem to suggest that they are encouraging this illicit money flow into the country, most likely under the false belief that this money flow supports their political agenda and/or personal financial gain.

  18. What will be done about the thousands of props which have already been bought for cash via student visa? My guess: nothing.

  19. but don’t expect that sort of volatility here.

    Now won’t they be surprised…

    • The best part is that currently the about most likely or nearly most likely proximal cause (in the sense of the last event before it happens) that could scupper Australian housing is…a massive drop in Chinese property, i.e. they haven’t diversified at all.

    • Shame this is a part of the Rudd legacy that the current mob are curiously unwilling to take down.

      • Yep, both make me angry, and both parties still ignore the issue and only give token gestures.

  20. The influx of Chinese into Sydney CBD in the last 6-12 months has been extraordinary. Groups of 30 on business tours here with the big Banks I hear, There was about 40 in the Stab today taking up my bar stools. I have no issue with the Chinese, but I do have an issue with the Gov being so sht scared to deal with foreigners buying existing property. It makes me want to break the law also. I also saw a group of around 20 on a walking tour around Double Bay on Saturday, all taking photos of property, zero of which were ‘new’. Come on Aust Gov, get off your ass and set an example.

  21. it isn’t just melbourne and sydney. i am 28 and currently in a search for a house. i was going through open houses in dubbo on the weekend. the first i visited, the cheapest currently available on the dubbo market, was an offputting sty for 240k+. the carpets were warped and damp, the walls covered in dirt, the rooms tiny. not i am not especially concerned about these things, but 240k for a place like that in *dubbo* is just ridiculous. an equivalent home in a town the size of dubbo in the u.s would be about 40-50k at the most. and there’d be a selection of at least five to ten similar houses with a similar price in the same town, so you get some choice as ell.

    personally i would like to leave australia, but there is no real escape from here for me.

    • Unfortunately even country towns are not immune to Sydney and Melbournes specufestors. It’s like Tassie and Hobart, it’s been ruined by interstate investors that are only interested in making a quick buck and force the cost of living for the locals to rise

      Even the town I live in, all the affordable housing is being taken by rich specufestors and renofestors.

      • i noticed at the open house i described none of the other people there were looking for a home, just an investment. there was a bmw belonging to another home-hunter parked out the front of this scabby, rundown house. definitely not looking for a home for themselves.