A New Cause of Unaffordable Housing — That Explain Why More Supply Cannot Help

Traditionally, economists and geographers consider economic factors such as housing supply and demand in explaining housing price changes. For example, the DW model is one of the most commonly used models which considers space markets, asset markets and construction markets in understanding housing price movements. Thus, most of the mainstream economists would consider housing supply as a solution to unaffordable housing. However, more and more studies found that housing supply cannot help dampen skyrocketing housing prices, especially in some of the mega-cities in the world. Yiu (2019a) has provided a review on these recent studies.

More recently, another 2 geographers (Rodriguez-Pose and Storper, 2019) also found that housing supply in the US is not negatively related to housing price growth, but weakly positive, as shown in Figure 1. They contended a new role of housing and dub it “housing as opportunity”:

“whereas some urban economists suggest a close relationship between housing supply and prices (with places that add supply having lower prices), Rodríguez-Pose and Storper find the relationship to be weak. … the basic motors of all these features of the economy are the current geography of employment, wages and skills.” (Florida, 2019)

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Figure 1 Housing Price Growth and Developed Land Area Relationship in the US. Source: Rodríguez-Pose and Storper (2019)

Yet, they still consider traditional economic factors such as migration of skilled labors (employment, wages and skills) that cause the housing price changes, but these could not explain why such an unaffordable housing phenomenon would become widespread globally after 2008.

A New Cause of Unaffordable Housing

Last week, Lindsay (2019) cited from the Expert Panel on Dirty Money’s latest report that “an estimated $5.3 billion worth of real estate transactions in B.C. [Canada] last year were the result of money laundering, helping to fuel the province’s skyrocketing housing prices.”

It accounted for 5% of the total real estate transaction amount and caused 5% upsurge of the real estate price. It also accounted for an estimated 72 percent of the $7.4 billion that the experts believe was laundered in total in B.C. last year.

Money laundering, snow washing, dirty money or terrorist financing are similar terms describing illegal money flowing around the world with an aim to convert them into legal money.

The best ways to snow wash dirty money are via gambling in casinos or buying real estates in megacities because they accept a huge amount of cash without any approval processes in general. That’s why the study was commissioned by the attorney general of British Columbia (BC), Canada as massive amounts of drug money and other illicit funds are found to be laundered through casinos in Canada and then flown into real estate markets.

German (2019) highlighted in the Dirty Money Part 2 report that “Opaque ownership structures allow criminals to remain anonymous and provide a veil with which to conceal money laundering activity in real estate. Of the legal entities that hold $28 billion in residential property in B.C., the vast majority are privately owned with no information on who ultimately controls them. There is no way to accurately identify nominee owners or properties held through unregistered trusts. … Unfinanced purchases, or ‘cash buys’, comprise 17% to 21% of residential transactions in B.C. They are more common among higher-risk buyers such as companies (29% to 38%), trusts (58%), nominees (20% to 28%) and offshore buyers (32% to 40%). The aggregate declared value of cash buys in the past 20 years is $84 to $212 billion (the current assessed value of those properties is much higher, at $230 to $440 billion).”

More interestingly, Fraser (2018) cited another report by the same expert panel last year which identified Hong Kong and Macau as the “pivotal” players in an international criminal racket. It implies that most of the dirty money is related to or from these two China’s SARs. In fact, casinos in Macau is now one of the biggest gambling centers in the world, and the housing prices of the two SARs are also the most unaffordable ones globally.

The unaffordability level of Hong Kong housing price can be reflected by the Demographia’s (2019) report that the median housing price to household income ratio is 20.9 in 2018, which all other cities are totally pale in comparison with, as shown in Figure 2. There must be something very unique in Hong Kong that can plausibly explain why housing price can continuously beyond households’ affordability for nine years. See Yiu (2019b) for the details of the affordability ratio.

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Figure 2 Median Housing Price to Household Income Ratio 2018. Source: Demographia (2019)

In fact, money laundering in Hong Kong has been exacerbating fast. Figure 3 shows the number of Suspicious Transaction Reports (STRs) from 2013 to 2019 (up to Mar), it climbed up from about 30,000 cases in 2013 to over 90,000 cases in 2017. The number of persons convicted is steadily at about 100 persons each year, but the sum of money involved in 2018 is increased to HK$7.8b (US$1b) as shown in Figure 4. Bearing in mind that these are just the convicted sums, which may just be the tip of the iceberg. JFIU (2019) also reported that about 6% of the STRs are real estate related, which seems to be much less than that of the B.C.

Figure 3 Numbers of Suspicious Transactions Reports (STRs) 2013–2019 (up to Mar). Source: JFIU (2019)
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Figure 4 No. of Persons Convicted, and Value of Assets Restrained (HK$). Source: JFIU (2019)

The openness of the economy is one of the major reasons why criminals would exploit Hong Kong as the base for money laundering. It basically allows free flow of money and welcomes funds from opaque ownership structures. For example, Hong Kong is ranked as the fourth highest amount of FDI in the world in 2018, but the top source of funds is from BVI. For details, see Yiu (2019c). Unfortunately, unlike B.C. Government, there is no investigation into the impacts of money laundering on real estate price in Hong Kong so far.


Florida, R. (2019) Building More Housing is No Match for Inequality, May 9, CityLab. https://www.citylab.com/equity/2019/05/housing-supply-home-prices-economic-inequality-cities/588997/?fbclid=IwAR1aQMrrvm6NOc_ZKs1UBwhUsvxrw9ZdsC1oCtIYpMmkMcvTb8ex6mQvrSo

Fraser, N. (2018) Hong Kong, Macau pivotal players in massive criminal racket using Canadian casions, ‘dirty money’ report claims, Jun 28, SCMP. https://www.scmp.com/news/hong-kong/hong-kong-law-and-crime/article/2152975/hong-kong-macau-pivotal-players-massive

German, P.M. (2019) Dirty Money — Part 2, Turning the Tide — An Independent Review of Money Laundering in B.C. Real Estate, Luxury Vehicle Sales & Horse Racing, B.C. Canada. https://news.gov.bc.ca/files/Dirty_Money_Report_Part_2.pdf

JFIU (2019) Statistics, Joint Financial Intelligence Unit, HKSAR Government. https://www.jfiu.gov.hk/en/

Lindsay, B. (2019) Money laundering funded $5.3B in B.C. real estate purchases in 2018, report reveals, May 10, CBC. https://www.cbc.ca/news/canada/british-columbia/laundered-money-bc-real-estate-1.5128769?fbclid=IwAR1d1VCbo5vjKUEHl-6utm-zpERCN2TGJK8ovnE463lA_r25_pSKwkz810E, A youtube at https://youtu.be/UBQHXjL4lSE [Expert Panel on Money Laundering in BC Real Estate (2019) Combatting Money Laundering in BC Real Estate, Mar 31, Minister of Finance and Deputy Premier, B.C., Canada. https://news.gov.bc.ca/files/Combatting_Money_Laundering_Report.pdf]

Rodríguez-Pose, A. and Storper, M. (2019) Housing, Urban Growth and Inequalities, Urban Studies, forthcoming. http://econ.geo.uu.nl/peeg/peeg1914.pdf

Yiu, C.Y. (2019a) Can increasing land supply suppress property prices?Jan 1, Medium. https://medium.com/@edwardyiu/can-increasing-land-supply-suppress-property-prices-49effc6de8e2

Yiu, C.Y. (2019b) Hong Kong Housing Market is Globally the Most Unaffordable One in the Past 9 Years, Jan 23, Medium. https://medium.com/@edwardyiu/hong-kong-housing-market-is-globally-the-most-unaffordable-one-in-the-past-9-years-b128011601f1

Yiu, C.Y. (2019c) Foreign Direct Investment Inflows to Hong Kong in 2018 ranks the 4th highest in the World, Feb 28, Medium. https://medium.com/@edwardyiu/foreign-direct-investment-inflows-to-hong-kong-in-2019-ranks-the-4th-highest-in-the-world-8b1c0cfb4abb

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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