When Property Prices Are a Crime

Commentary, Housing Affordability, Lee Harding

Everyone knew that Vancouver housing prices were criminal—they just didn’t know by how much.

By now, many citizens are aware that offshore money, mostly from China, has been laundered through casinos and invested in properties which have often been flipped through shady realtors and unlicensed brokers. The new government in British Columbia has talked a good talk about dealing with the problem, made a few moves, and promised more. Taxpayers, however, should have more skepticism than hope.

Like most multi-million-dollar criminal schemes, this one takes some explaining.

The story starts in China where citizens are barred from taking more than $50,000 out of the country. British Columbia disbanded its integrated illegal gaming enforcement team in 2009, making its casinos an easier place to launder cash. Property was a great investment, and realtors with shady conduct would probably never get caught. After all, by 2015, Fintrac, Canada’s anti-money laundering agency, had only fined seven realtors in its history.

Asian gamblers, mostly Chinese, became the high rollers in B.C. casinos. Disclosed government reports reveal that the top 20 gamblers traded more than $100,000 of cash for chips at every gambling session. A casino would be stupid to question its best customers, and the B.C. Lottery Corporation did little more than report suspicious transactions to Fintrac. By fiscal 2014-15, suspect transactions had risen to 1,737, accounting for a whopping $176 million, or 10 per cent of the government’s gaming revenues.

By 2015, the media reported the presence of Chinese police in Vancouver to investigate money laundering involving real estate. Fintrac finally investigated and announced in March of 2016 that 55 of the 80 Vancouver real estate firms that were examined had “significant deficiencies” when reporting the identities of buyers and sellers.

The province cracked down by curtailing large cash transactions and introducing a 15 per cent foreign buyer tax in the Greater Vancouver area. The short-term effect was new tax dollars for the government, fewer house sales, and a sudden spike in farmland prices and purchases, since they were outside the new tax.

The long-term effect, however, was minimal. Big players in casinos used huge bank drafts instead, and real estate buyers used shell companies to obscure the identities of buyers. Because the foreign buyer tax did not apply until a name appeared on the land title, pre-sale contracts flipped properties like hot potatoes many times before they were even built. The new NDP government has assigned Peter German to review this situation. But, so far his recommendations aren’t earth-shaking. Casinos need more investigators and more stringent reporting of the identity and source of funds for large cash transactions. His full report is due by the end of the month, and needs more substantial recommendations.

Computerized big data analysis has the potential to red-flag suspicious transactions, but this won’t be easy. Information is separated in provincial and federal agencies. The province wants to automate the sharing of house purchase information with the CRA, but will that happen? BCLC employees can’t even use their own $7 million software to  identify money laundering, let alone share information with other government agencies.

For now, the NDP government relies on an old standby: affordable housing paid for by new and higher taxes. They balked at applying the foreign buyer tax to pre-sale contracts, so property flipping won’t slow down, and it certainly won’t stop.

Instead, the government increased the foreign buyer tax to 20 per cent and extended its range further up the Fraser Valley, the Okanagan, Kelowna, Victoria, and Nanaimo., The expanded tax will bring in $40 million per year. In addition, a new speculation tax is aimed at vacant properties in those areas. That tax is 0.5 per cent of annual income this year, rising to 2 per cent in 2019 when it will take in $200 million. The property transfer tax will go up for homes valued above $3 million.

The conclusion represents a cruel irony for taxpayers. The Liberal government grew addicted to casino profits from laundered foreign money. The NDP gained power by promising action on this issue. That action was to use taxes to get the same amount of money. Yet, this tax can only reap this revenue if the problem still remains.

Criminals come and criminals go, but government theft is here to stay, especially in Vancouver’s housing market. It is time for the BC government to get serious.