UK Vows to Crack Down on Money Laundering: What Will This Do to the Property Bubble?

The London property market is already in trouble.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The British government has suddenly realized that the London property market is “becoming” a “destination of choice” for laundering the proceeds of overseas crime and corruption. And it has done what it always tends to do in delicate situations: it has called an inquiry into the matter.

“Given the threats that face the UK, the effectiveness of the regimes that we use to protect our financial system from misuse have never been more important,” said Member of Parliament Nicky Morgan, Chair of the Treasury Committee. “As part of our inquiry, the Treasury Committee will examine the UK’s role in international efforts to tackle money laundering and terrorist financing and implement sanctions.”

Earlier this month Prime Minister Theresa May said there was no place for “serious criminals and corrupt elites” in the UK — an absurd statement given that London’s Square Mile has been home to almost every major global financial crime and scandal of the last ten years, including Libor, Forex, the London Whale, and rampant gold and oil-price rigging. And for years the City of London has been the place where the world’s richest gangsters dream of stashing or laundering their cash. According to the British government’s own National Crime Agency, “hundreds of billions of US dollars” are laundered through banks in the United Kingdom every year.

Theresa May is not the first British prime minister to accuse the City of London’s property market of “being used” (as opposed to “offering its services”) as a conduit for so-called “dirty money”. In 2015 her predecessor, David Cameron, the son of a man who made his fortune operating a network of offshore investment fundsvowed to expose the use of “anonymous shell companies” to buy up luxury UK properties, often in London.

As part of a global effort to defeat corruption, foreigners would be prevented from buying UK homes with “plundered or laundered cash,” Cameron warned. Corruption, he added, is “a cancer which is at the heart of so many of the world’s problems” and must be tackled. Since then the UK government has done virtually nothing to tackle the problem, which should come as no surprise given how much the UK capital has come to depend on overseas demand, illicit or not, to prop up its real estate market.

New research by the School of Management and Business at King’s College London has shown that foreign property investors have added around 20% to UK real estate values over the period between 1999 and 2014, a period over which house prices almost tripled.

Using figures recorded by the Land Registry, the analysis shows that the average price is around £215,000 but would have been about £174,000 without the investment from overseas. In the capital, long the focal point of overseas property investment, the effect has been even greater. And the study found that “there is evidence that foreign investment reduces home ownership rates, suggesting that some residents may be priced out of the market in areas where foreign investors are more active and have to rent rather than own their homes.”

One major consequence of this trend has been to price most ordinary Londoners out of the market. Buyers from overseas don’t just have an effect on the upper end of the housing market where most of their demand is concentrated since there is a “trickle down” effect to less expensive properties, the research shows.

In a 2017 poll conducted by YouGov on behalf of Transparency International UK, 54% of Londoners said they believe house prices are being ratcheted up by rich people from overseas cornering the high-end property market. More than 1 in 5 of respondents thought international buyers were purchasing property in order to launder money. And now, the government is once again showing an interest in the problem.

But is it really? After all, if the capital’s struggling real estate market is as dependent on the proceeds of international crime as even the government now seems willing to concede, what would happen if much of that demand were to suddenly dry up due to fears of a government crackdown?

London’s property market is already in trouble, having entered a prolonged period of stagnation since the Brexit vote in June 2016. Those at the top end of the global wealth and income scale — just about the only people left who can afford to buy residential property in London these days — either have less money to spend or are spending it elsewhere. Some are even splashing it around other parts of the UK, where better value deals can be found.

UK’s prime regional housing markets continue to outperform London’s top postcodes. Prices in the capital dropped by 1% year-on-year in the previous quarter, according to Nationwide’s monthly survey of the market, once again making it the weakest of all the UK’s regions in terms of price growth, a position it has held since late 2017.

At its zenith London’s property market was estimated to be worth as much as the annual GDP of the world’s ninth biggest economy, Brazil. But prices have fallen since then. If the trend continues, it could become a serious problem for the UK economy as a whole. For that reason alone the UK’s government’s latest threats of a crackdown on illicit funds entering the market should be taken with a healthy dose of skepticism. By Don Quijones.

Two large British outsourcers are also on the verge of collapse, and the vultures are circling. Read… Was Carillion’s Collapse the Beginning of the End for UK’s Outsourcing Sector?