22 Feb 2017

The cost of dirty money in the London property market

Lisa writes*

In 2016, the UK was titled the most corrupt state in the world according to a world-renowned Mafia expert, Roberto Saviano. These accusations were not centred upon corruption in the public sector, but instead it was the private sector that harboured the most corrupt activity. Transparency International revealed that the London property market, in particular, hosts an environment which attracts money launderers due to secrecy laws surrounding the real owners of property owned by overseas companies.

Around 36,000 London properties owned by overseas companies “were bought via secrecy jurisdictions, such as those named in the Panama Papers.” The majority of these properties have little or no data on their real owners which means that they could be linked to Politically Exposed Persons (PEPs) – people who have the greatest risk of being corrupt. Although most properties are purchased legitimately, “there is little doubt that some have been bought using the proceeds of embezzlement or other crimes”. For example in 2012 James Ibori, a former governor of Nigeria's Delta State, was imprisoned in London for 13 years due to “money laundering and fraud offences involving up to £150m from the Nigerian public purse”. The majority of this money was laundered through buying property in London. In addition, the Panama Papers revealed that a member of Gaddafi’s inner circle owns a multi-million pound portfolio of property in Scotland and London.

One major cost, noted by the National Crime Agency, is that due to the scale of the situation London house prices have become “artificially boosted”. This results in a market failure due to incomplete information of the buyer’s honesty about the origins of the money used to buy property. When prices of a good or service rise artificially it creates negative pecuniary externalities for other potential buyers who may not be able to afford the good at it’s higher price. Pecuniary externalities differ from "real" externalities (such as those from pollution) because they act through prices rather than real resource effects. In the aforementioned example, homebuyers further down the property ladder experience negative pecuniary externalities which may make it difficult for them to get onto the property ladder. Since 2007 “the average asking price for a 3-bedroom apartment in London has increased by over 300,000 pounds”. In addition, demand for high-end properties from money launderers, due to the fact that they can legitimise more money by investing in a higher-priced property, creates incentives for property developers to build more luxurious house “rather than concentrating on the homes London genuinely needs.” As a result, many of these luxurious properties become “ghost mansions” (properties that remain unoccupied as their only use is to conceal the illegal origins of money) – there are reportedly 700 of these in London and are worth an estimated 3 billion pounds. Land is already vastly scarce in London which makes it difficult to fathom the wastefulness of the land that these “ghost mansions” sit on.

Bottom Line The embezzlement of dirty money into the London property market has distorted prices of property by raising them artificially.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.

1 comment:

Muhammad said...

Very interesting post indeed! It is now clear to me that the current housing prices in London have been artificially constructed, as you have described the current costs property seekers bare. However this does trigger the thought of future costs which raises the following point: if the housing prices are indeed artificial due to corrupt property right holders, does this not mean that in the near future they will suddenly drop as enforcement measures will incrementally improve? And how will this potential housing price drop affect the discount rate for current property owners in London, as well as the individuals liable to invest in property? Apart from that I found your post to be well constructed and insightful.

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