Why New York Real Estate Is the New Swiss Bank Account

http://nymag.com/news/features/foreigners-hiding-money-new-york-real-estate-2014-6/

by wallflower • 12 years ago

92 91 12 years ago

jzwinck• 12 years ago

About five years ago I saw a chalkboard outside a trendy SoHo NYC apartment. For sale: 2 million euros.

The same story is playing out in London as well, with the consequence that many central flats lay empty most of the time, owned by foreigners who would rather lose out on some rental income than risk the hoi polloi damaging their artwork.

By the way, in NYC it is usually not as hard to find the true, human owner(s) of apartments purchased by "corporations" as the article implies. It takes more than a quick Google search, but the information is usually around if someone wants to know about a particular unit.

junto• 12 years ago

A new expression for me - "Hoi Polloi".

http://en.wikipedia.org/wiki/Hoi_polloi

DrJokepu• 12 years ago

This is actually not uncommon in British English.

logicallee3• 12 years ago

it's problematic, because people use it to mean the commoners (the prolitariat) and the snooty (the few). It doesn't matter that the latter is technically wrong - it's where you're likely to hear it in conversation.

it's like the phrase "fulsome praise". Can't really use it. is it lavish, or overdone/excessive?

http://www.merriam-webster.com/dictionary/fulsome

benjaminwootton• 12 years ago

On similar lines, I was in Hong Kong a few months ago and saw quite a few adverts for investing in London property. Global markets really do exist for top tier property.

It's really quite depressing being in the top few % income wise but not having a hope in hell of competing with the global market and the people taking on reckless levels of debt. Our housing markets are broken on so many levels.

pjc502• 12 years ago

It's not enough to be in the top few %, the top 0.1% have orders of magnitude more money than you.

BSousa• 12 years ago

For me, it was even more surprising when I was driving out of Algarve recently (South of Portugal) and saw a billboard about buying and selling Hotels. Not villas, full blown Hotels like it was freaking Monopoly.

citricsquid• 12 years ago

The BBC did a feature earlier in the year about London property and Hong Kong investors, it provides a good insight. https://www.youtube.com/watch?v=dINbQGgVEN8

bane• 12 years ago

It doesn't have to be global markets. Real estate speculation pushes up prices everywhere.

arethuza• 12 years ago

Hasn't Monaco been the base for that kind of property speculation since at least the 1960s?

Jacqued• 12 years ago

The same thing happens in Paris, where about 15% of flats are said to be empty. In central areas, 25% to 30% are empty. There has been some talk about new laws to fight off this rampant death of the city but nothing was enacted so far.

I think municipalities and local governments ought to make it really hard (or ridiculously expensive, even for the .1%) to own a place in tense areas without either living in it or renting it.

ars• 12 years ago

It's not that hard. You make a high property tax, but add a homestead exemption[1], if you live there you get a discount on the tax. Either off of the percent or a fixed dollar amount you can deduct.

This doesn't help if you want to encourage rentals though.

[1]https://en.wikipedia.org/wiki/Homestead_exemption

disputin• 12 years ago

Land Value Tax.

http://en.wikipedia.org/wiki/Land_value_tax

http://en.wikipedia.org/wiki/Henry_George

http://en.wikipedia.org/wiki/Law_of_rent

mathattack• 12 years ago

Unfortunately this does have some livability implications for those of us trying to live side by side by other people's piggy banks. I'm not sure what the answer is, other than to zone very heavily for new construction.

stephenitis• 12 years ago

They should buy SF real estate and further skew things here...

swang• 12 years ago

Most likely, they are already here buying up property.

wiradikusuma• 12 years ago

Shouldn't a huge cash transaction trigger suspicion from IRS/whatever agency interested in knowing the whereabouts of the money? E.g. in Malaysia, the reason why people buy cars (let alone properties) in installments (even they can afford cash) is to avoid tax dept come knocking their door.

pmorici• 12 years ago

These are not American citizens so the IRS wouldn't care.

abc123xyz• 12 years ago

I read before somewhere that US estate agents managed to get an exemption from various KYC and money laundering requirements...

pessimizer5• 12 years ago

"It's a sophisticated, well-oiled system that rarely requires crude subterfuge. Though U.S. authorities track all transfers over $10,000, a wire into a real-estate lawyer’s escrow account should look perfectly routine. 'A lot of times, I don’t even know where my clients are from,' says the lawyer Bruce Cohen. 'But I know that certain countries are very careful about the money that leaves their country.'

"There is nothing illegal—at least from the destination nation’s perspective—about sending money from an anonymous offshore bank account to purchase property in America. On the contrary, it’s an everyday occurrence. That is precisely why experts say that property investment is a favored route for money laundering, a crime that depends on the outward appearance of legitimacy. The laundering process typically happens in stages: Illegal cash enters the world financial system somewhere and is funneled into a maze of accounts and shell companies, a process called 'layering.' Finally, at the other end, funds are integrated into a seemingly respectable investment—like a luxury condo."

(TFA)

sanmon3186• 12 years ago

In India, we witness both new as well old/real Swiss Bank being used to stash illegal money. Given land/capita availability, real estate is skyrocketing in most parts. A descent independent house in tier-2 cities in India is costlier than what one would pay in NYC (I don't mean Manhattan). Middle class, say a school teacher, just can't afford a house in most of cities while rich are investing in lands, houses and other forms of real-estate.

supahfly_remix2• 12 years ago

Do these purchases affect the NY real estate market as a whole (other than say, skewing statistics)?

For lower end housing stock, homeowners usually "jump" up to more expensive properties as they become more financially stable or as they need the room. This market seems entirely disconnected from that, but I'm not sure.

001sky2• 12 years ago

Yes, these are only the headline grabbers. This is an old story. London has had this problem for over a decade.

michaelochurch5• 12 years ago

Price inelasticity is worth noting. A small amount of supply destruction will make prices spike significantly. That's why NYC's legacy rent control system is such an issue. It only affects about 1-2% of apartments, but that probably pushes rents up 50% or more.

So, yes, the fact that global-elite billionaire scumbags use our real estate to launder their drug/blood money is a huge issue.

For lower end housing stock, homeowners usually "jump" up to more expensive properties as they become more financially stable or as they need the room.

That seems to be a Boomer thing. They bought the 3000 SF houses that are impossible to maintain unless you hire maids (which Americans don't like to do, even though at $20/h they're still cheaper than doing your own cleaning). I think the young generation values freedom and experiences (e.g. travel) more than stuff and space. Frankly, I find McMansions depressing.

Unfortunately, in many cities it's impossible to get a 1000 SF place at an appropriate price. You end up buying or renting 2000+ because that's all there is, unless you're talking about seriously defective housing (e.g. no laundry in the building, no dishwasher.)

pierrealexandre• 12 years ago

Isn't the phenomenon you describe extreme price elasticity rather than inelasticity?

Also, any source for your assertion about the effect of rent control on rents in NYC? I'm very interested in this if you have it.

supahfly_remix2• 12 years ago

Agreed that money laundering is a big issue, but are you saying that these properties affect prices for homes purchased by normal people? Are these properties are affected by rent control, or were you using that as an example?

yummyfajitas2• 12 years ago

People are investing money in housing for the same reason they invest in gold: they aren't making more of it.

There is a simple solution to this. NY could allow as much new housing to be built as the market would bear. They could allow existing stock to be properly utilized, rather than giving long term tenants quasi-property rights (which also hinders new construction of anything other than luxury condos).

The more money those evil foreign devils pour into the market, the more money local construction workers will happily take from them.

imaginenore• 12 years ago

Gold is actually mined at around 2,500 tons per year,thus devaluing it by around 2% (depending on the estimates of the total gold hoarded, which is fuzzy).

The amount of gold on our planet is quite staggering, including oceans and deep water sediments.

pjc502• 12 years ago

Which unused corner of Manhattan do you propose building on?

yummyfajitas2• 12 years ago

Whichever corner contains buildings owned by people willing to sell to developers.

jhonovich• 12 years ago

This will burst as it is based simply and obviously on the greater fool theory and is devoid of any fundamental cash flow generation (i.e. rents).

huhtenberg• 12 years ago

The problem of course is that it's unclear when it will burst.

Take Vancouver, Canada real-estate market, for example. It's the closest Canadian city to Hong-Kong / China, it's friendly to foreigners buying properties and it has a sizable Chinese population that can act as a proxy if needed. The house prices were inflating from late 90s. In mid '00s it became a common understanding that there's a bubble. A modest 500 sqft flat in downtown Vancouver was going for close to 500K and proper houses in decent areas were in 2-3 million range. Our place appreciated over 100% in a matter of 4 years. Tons of apartments in downtown and new condo developments sat empty, which was especially easy to tell at night. But the bubble wasn't bursting. Nor was it deflating. Moreover, tour buses driving mainland Chinese suits around open houses on their 2-3 day "buy all!" flash visits transformed from a one-off exotic thing to the routine. Local government doesn't do a shit about this. They are happy as this feeds the construction industry, creates jobs and they also get to tax all these new developments. Their hand is stuck in a cookie jar. In the end all these buildings are just a way to park the foreign money and so the Vancouver housing bubble is tied directly to the state of Chinese economy. The only way for it to subside is for China to have an economic crisis.

It is a greater fool situation indeed, but regrettably it unfolds at a state level.

michaelochurch5• 12 years ago

This will burst as it is based simply and obviously on the greater fool theory and is devoid of any fundamental cash flow generation (i.e. rents).

The 2014-era housing bubble is driven not by runaway money-printing as in 2008, but by foreign corruption. Silicon Valley is expensive because every thieving Chinese official has a house out there in case things go seriously wrong (corruption is a death-penalty offense in China). As it turns out, rich people will pay a nearly-infinite amount of money to not die.

We're not talking about tulip bulbs. We're talking about personal safety for some seriously bad people who are at risk of being killed by their own people (who they've been robbing for decades) and who, quite frankly, deserve to die.

erehweb• 12 years ago

Interesting theory, but why buy the house in SV rather than more affordable L.A.?

JacobAldridge4• 12 years ago

Single Page: http://nymag.com/news/features/foreigners-hiding-money-new-y...

JacobAldridge4• 12 years ago

"The latest [Knight Frank report] produces the curiously precise estimate that there are 167,669 individuals in the world who are “ultrahigh net worth,” with assets exceeding $30 million."

I'm amazed at how few people sit in that strata - $30 million gets you into the Top 0.0024% of the world's population. While it's twice my (inflation-adjusted) financial goal, I still would have thought a larger number of people would be there.

Perhaps this fails to account for assets spread across a number of corporate entities?

alexjeffrey• 12 years ago

or perhaps you don't realise how privileged you are in that even $1 million is attainable.

JacobAldridge4• 12 years ago

I'm curious about what in my comment suggests I don't appreciate the fortune that was simply being born into a first world democracy? Even if we just use the ~1Bn people with that privilege, I remain surprised at Knight Frank's number.

chillingeffect• 12 years ago

You identified what I call an interesting "mid-band" of wealth, so I'd like to swizzle the numbers a bit more for perspective:

$30 Million is certainly "fuck you" money. Assuming anyone with that amount has 30-60 more years to live (e.g. is 40-70 years old), that means they could spend at least $500,000 per year, or $1,369 PER DAY for the rest of their life.

That is more than my monthly rent. They can spend that per day. And, AND they don't have to work all day. They could volunteer, run propaganda campaigns, get high, research stocks, play guitar, learn Swift, paint, ANYTHING.

Well, except buy a new car every day. If you want a Lamborghini, at ~$120k, you'll still have to "save up" for 85 days! So it's not the absolutely, mind-bogglingly, helicopter-dogfight rich. And you certainly couldn't go nuts with art:

You couldn't even buy the cheapest painting on Wikipedia's "most expensive paintings" list. [0].

[0] http://en.wikipedia.org/wiki/List_of_most_expensive_painting...

Anyway, I'm glad there are less than 170,000 people who don't have to do anything at all to live.

pessimizer5• 12 years ago

Anyway, I'm glad there are less than 170,000 people who don't have to do anything at all to live.

Don't have to do anything at all to live better than everyone else in the world, that is. There are a lot more who are dependent on various safety nets. We're cutting food stamps, because we think they shouldn't eat as much.

pessimizer5• 12 years ago

Interest rates are too low, the stock market is overvalued, and the financial system is untrustworthy. There's nowhere to put money and get a decent return on it with no prospect of completely getting wiped out other than real estate.

Also, if you can buy in or near a "fortress" area like Manhattan or San Francisco, and you'll never need the cash, you can just wait for the next bubble if prices/rents collapse.

edit: reading more of this, I'd say the dumb money is going towards extravagant luxury, though. Those $30M apartments could fall to $3M and never rise again. I'm talking more single-family housing, and those buyers have actually slowed down considerably lately because prices have gotten too high.

edit2: I've been drawn in - this is a very good article. The tl;dr is that world scum is using NYC luxury real estate to launder money and avoid taxes. What I thought was "dumb money" is dictators, oligarchs, etc., who aren't looking for profit, just trying to get their ill-gotten gains out of their home countries.

a8da6b0c91d• 12 years ago

LOL, the feds browbeat the Swiss into coughing up account information but then allow blatant tax evasion on a grander scale inside American borders. Might makes right, I guess.

Scoundreller3• 12 years ago

Didn't you know? Paying taxes is for Americans.

cpwright• 12 years ago

As an NYS (but not NYC resident), I find the following quote the most offensive part of the entire article:

In New York, by contrast, buyers of new construction often qualify for a tax abatement. At One57, currently the city’s most expensive new address, the tax break amounts to around 94 percent. A Times analysis estimated that its priciest penthouse, which is reportedly in contract for more than $90 million, would initially be billed less than $1,500 a month.

So basically, the foreign absentee buyers of these luxury buildings are able to avoid paying property taxes on most of the assessed value, forcing the "regular" residents or landlords to pay more than they would otherwise have to if these apartments were taxed at the same rate.

jcampbell1• 12 years ago

I agree it is a problem, but the foreign buyers did fund the construction of "affordable housing".

I think the policy of granting tax abatements for developing affordable housing is nuts, but some of that $90 million was used to help the working class.

hyperliner• 12 years ago

I agree. This is no different than state governments granting companies generous tax relief for the "creation of jobs," which more times than not are a few hundreds of minimum wage jobs. Doing the math, it does not make sense, but I guess the rationale is that you get $1500 or zero. I am not really sure at what cost though.

imgabe3• 12 years ago

I think this is the beginning of the end for New York and other cities where this is happening.

Why is New York real estate valuable in the first place? Because a lot of people want to live there.

Why do they want to live there? Because there's a lot of other people there, and those people can afford them various opportunities in their chosen field.

If New York becomes a wasteland of empty apartments held by overseas billionaires, none of the people that make New York a desirable place to live (and thus, a valuable apartment to own) are going to be there making it desirable (and thus, making the apartments valuable).

Everyone I know who's living in New York can't wait to leave. It's a miserable place to be unless you're a billionaire. These people are destroying the value of their own investments just by making the investment in the first place.

hullo• 12 years ago

No offense, but you should really try and meet more people, if everyone you know feels that way. Maybe your peer set isn't diverse enough? Or seek geographic variance? Everybody here seems to be talking about multi million dollar SoHo lofts and what not, which are honestly not even a little bit relevant to the lives of most of the millions of people in the city.

cddotdotslash2• 12 years ago

"A miserable place to be unless you're a billionaire." This is such a vast exaggeration, it's difficult to take your comment seriously. Is New York expensive? Yes. Is it impossible to live here, and have an enjoyable experience on $60,000/yr (even less with some sacrifices)? Not in the slightest.

imgabe3• 12 years ago

"not impossible" isn't nearly the same thing as "desirable" or "worthwhile". If the strongest endorsement you can make is that it's possible to live there, that really isn't much of a recommendation.

mullingitover• 12 years ago

Everyone I know who's living in New York can't wait to leave. It's a miserable place to be unless you're a billionaire.

This has already started! [1]

[1] http://www.theonion.com/articles/84-million-new-yorkers-sudd...

TomDavey• 12 years ago

If New York becomes a wasteland of empty apartments held by overseas billionaires

No chance of this happening. NYC has over 3 million housing units. There are many fewer overseas billionaires, fortunately.

I own and occupy a 2-bd 2-bath condo in NYC. It's in Central Harlem and I love it here. I have no thought of moving and am not worried that Russian oligarchs are going to turn the city into an empty wasteland.

Real estate prices in Manhattan are heavily influenced by neighborhood naturally and, on the very high end, signature amenities such as wrap-around terraces and views of Central Park. But we're talking about 10,000 ultra-high-end units out of 3 million across the 5 boroughs.

In my Manhattan neighborhood, even new condos in full-service concierge buildings are vastly more affordable than the small slice of luxury units described in this article. The price per sq ft in Harlem is one-third of what NY Mag is talking about.

I say, let the billionaires blow their dough on my town. Their market is small and finite; long-term consequences are small. Meanwhile, the rest of us, a vast number in comparison, as a result will see our home values appreciate a little faster over the long run, probably.

busterarm• 12 years ago

I felt this way and I left.

After 3 years, I'm moving back. I've gotten over the issues that were bothering me about New York and realized that my success in the city will require me to work for it. Where I ended up is a much more miserable place to live.

I couldn't be more excited to go back to NY. I had the native's perspective (grew up in Midtown) and now I'm getting the transplant's one by moving back.

Non-billionaire, btw.

restalis2• 12 years ago

"New York becomes a wasteland of empty apartments held by overseas billionaires"

Don't worry, they'll take only the good ones. Surely there will be plenty of space left for the rest of you! Who's gonna do the non-billionaire stuff otherwise?

djb_hackernews• 12 years ago

It's not just New York. In Boston lots of foreign investors, mostly Chinese. They are coming in over asking prices, with cash. Basically impossible to compete with.

Redfin recently released a housing report[0] that acknowledged the recent "recovery" as fueled by investors, regular home buyers are still on the sidelines. This is clear to me via anecdote, I've heard from friends and online forums from people in the JP area where multi-families are being bought in droves by corporate landlords. It seems to me that the historical pattern of real estate transactions being between generations and socio-economic classes will be no more. If the corporate landlords want to sell, they'll be selling their portfolios to other investor types. I wonder if in another 20 years we will have an exodus to the 'burbs similar to the 50's and 60's.

[0] http://www.redfin.com/research/reports/real-time-price-track...

restalis2• 12 years ago

"And so New Yorkers with garden-variety affluence—the kind of buyers who require mortgages—are facing disheartening price wars..."

"Competition will continue to drive the wealthy—foreign and domestic—to Brooklyn and middle-class buyers to despair."

Add to that the fact that a young middle-class lads and gals start out having already an high debt from the acquired education...

Why New York Real Estate Is the New Swiss Bank Account

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