VANCOUVER—Money laundering “distorted” the B.C. real-estate market, hiking prices by as much as 20 per cent in Vancouver, the province’s finance minister said during an announcement of a long-awaited public inquiry into dirty money.

The inquiry, which will have the power to subpoena witnesses and make court applications for records, came after the release of three reports detailing the presence of money laundering in B.C. casinos, real estate and luxury cars. The reports also highlighted Canada’s weak money-laundering laws and under-resourced policing system.

“Last week’s expert panel report estimated for the first time the extent of money laundering infiltrating our economy, particularly our red-hot real-estate market,” said Minister Carole James during a Wednesday press conference.

“The panel’s estimate of $7 billion being laundered in B.C. was more than anyone thought.”

Economists say a multitude of factors — some legal, some not — caused the enormous run-up in housing prices that peaked in 2016.

But while money laundering can’t explain the entirety of the problem, it’s clear that voters, who voted the BC Liberals out in 2017, are alarmed at the pace of the increase and want answers, said Tom Davidoff, an economist at the University of British Columbia.

“(Price growth of) 60 per cent in two years for single-family homes … People don’t like this magnitude of change this quickly,” said Davidoff.

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“So devoting resources to figure out what can be done to put us on a smoother footing in the future with changes in prices and getting to better affordability, it might lead to policy improvements because it could lead to understanding how much naughty money is in the economy.”

While two of the three reports also examined money laundering in casinos and luxury goods, the government’s focus during Wednesday’s press conference was squarely on real estate.

B.C.’s real-estate sector provides a larger share of its gross domestic product than most provinces. At around 25 per cent, government data shows, real estate and construction is to British Columbia what oil and gas is to Alberta.

For years, real-estate industry insiders and some economists explained Vancouver’s soaring prices as an outcome of supply-and-demand economics, with the city’s constrained land supply and desirable location as the key factors.

But public anger grew as housing prices jumped by as much as 40 per cent in one year in June 2016, leaving many potential homeowners hopelessly behind and leading to rising rents and homelessness.

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James described the real-estate boom as a destructive force that has had a negative impact on the economy as a whole.

“We have the best labour market in the country and we have trouble getting people because they take a look at the real-estate market and go somewhere else,” James said.

Tsur Somerville, an economist at UBC, worked on one of the landmark reports the government is relying on. Using an economic model that estimated the amount of money laundering in several Canadian regions, the three authors of “Combating Money Laundering in BC Real Estate” calculate that $7.4 billion was laundered in B.C. last year. Of that, $5.3 billion flowed into real estate, bumping up prices by five per cent.

Somerville suspects money laundering in B.C. is actually higher than that number. Because of the oversized role real-estate plays in the B.C. economy, he’s concerned unravelling corruption in the system could affect jobs and economic growth.

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“When that unwinds and we get back to more normal circumstances, then there’s a whole bunch of economic activity that was feeding off of something that wasn’t there,” he said.

While the effort was made to quantify money laundering’s role in the growth of real-estate prices, no one has attempted the complex work of measuring other factors: buyer psychology, speculation, low interest rates or people seeking a safe haven to place money earned in another country.

A host of provincial and municipal taxes aimed at speculation, tighter federal mortgage rules and stricter capital controls from China appear to have dramatically slowed the Metro Vancouver market.

But it’s too early to know which policies had the most impact, Somerville said.

“It’s going to take time to figure that out,” he said. “I suspect because demand here had multiple facets, you need multiple methods to address it.”

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