Stop money laundering so our children can buy homes

By Unconventional Economist in Australian Property, Featured Article

at 10:09 am on June 1, 2015 | 95 comments

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.