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The Canadian Real Estate Association's Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Submission by The Canadian Real Estate Association to the Department of Finance
Review of Financial Institutions Legislation
May 31, 2005
Director, Financial Insitutions Division
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Ottawa, Canada K1A OG5
Dear Mr. Salembier,
On behalf of The Canadian Real Estate Association (CREA), I would like to thank you for this opportunity to contribute the views of Canada's real estate industry to the current federal review of the financial services regulatory framework.
CREA has reviewed the consultation document published with the 2005 Federal Budget, and is pleased to provide comment on two matters that are of special interest to CREA and to REALTORS®. These are the questions of expanding the power of financial institutions to undertake commercial activities and providing increased flexibility to residential mortgage lenders.
The Association recently discussed these two proposals with more than 280 real estate industry leaders at our 22nd annual CREA Political Action Committee Conference in Ottawa. Through careful consideration of their feedback and the guidance of CREA's Federal Affairs Committee, the Association is satisfied that the current legislative and regulatory provisions are serving the interests of Canadian consumers and real estate markets well.
CREA has strong reservations, however, about making any changes to these two policy areas. The Association believes that the impact of changing "the 75 per cent rule" has not been adequately studied and could have unintended consequences for real estate markets and consumers - particularly first time homebuyers. CREA believes that further study is required before any changes are considered.
CREA also has concerns about expanding the commercial powers of financial institutions into the area of real estate brokerage. Canada's brokerage industry is competitive and has a strong track record of customer satisfaction and sales success. The Association strongly opposes any expansion of the financial services industry into real estate brokerage business.
The Association's position on these two matters is outlined in detail in the attached submission. Should you require additional information, please contact CREA External Relations Director James Brennan at 613.237.7111 or firstname.lastname@example.org.
Original signed by
Pierre Beauchamp, FRI(E)
Chief Executive Officer
The Canadian Real Estate Association
Canada's Real Estate Industry
The Canadian Real Estate Association (CREA) is one of Canada's largest singleindustry trade associations, representing more than 78,000 REALTORS® across the country who work through 102 real estate Boards, 10 provincial Associations and one territorial Association.
The Association owns the MLS® trademark, has proprietary ownership of the REALTOR° trademark, and operates national web sites including mls.ca for residential properties and ICKCA for commercial listings across Canada.
CREA's primary mission is to represent members at the federal level of government. The Association has frequently taken strong stands to defend the public's right to own and enjoy property, and invests resources to develop policy initiatives that promote home ownership, property rights and real estate investment.
Real estate is a major component of the Canadian economy, and has outperformed most other sectors in recent years. Residential, commercial, industrial and recreational property transfers and development represent billions of dollars in direct and indirect spending to the national economy annually.
The industry is competitive, and places a strong emphasis on the education and professionalism of its members. All REALTORS® in Canada must adhere to a strict national Code of Ethics and Standards of Business Practice in addition to provincial government standards that vary from province to province.
The federal government is seeking stakeholder views on providing more flexibility to residential mortgage lenders and homebuyers by removing the statutory restriction on residential mortgages exceeding 75 per cent of the value of the property.
In the consultation document, the federal government suggests that the statutory requirement "may have increased the cost of homeownership to some Canadians". While mortgage insurance is one of the costs of homeownership for buyers who require high ratio mortgages, the federal government must also weigh the potential consequences of modifying or removing the current policy with the benefits of the existing statutory restriction.
Removing substantial numbers of contributors to the mortgage insurance pool could put upward pressure on premiums. Recent declines in premium rates - which have been particularly beneficial to first-time homebuyers and Canadians with lower incomes - could be reversed over time.
It would also be up to mortgage lenders to decide whether a mortgage loan would require the applicant to obtain insurance in the absence of a statutory restriction. There could be many losers with such a discretionary policy. To the extent that these buyers are highly leveraged because of limited financial resources, the removal of the statutory restriction would be ensuring that those least able to pay would be forced to pay more for mortgage insurance.
As outlined above, the benefits of changing the current system are unclear-and could in fact hamper the ability of some Canadians to obtain their dreams of homeownership. By contrast, there are several clear benefits to the current system even though there is a higher cost for some buyers.
With the statutory restriction, mortgage insurance provided by Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial has enabled millions of Canadians to finance the cost of a home with very low down payments.
The existing regime has allowed CMHC to generate strong reserves to protect against downturns in the markets, while providing flexibility to the government to allocate retained earnings within the housing policy framework.
Economic growth, low interest rates and a high demand for homes based on strong consumer confidence have contributed to large and growing annual surpluses at CMHC in recent years that exceed actuarially-based prudential requirements. This has allowed CMHC to lower premiums twice since July 2003, for a total 30 per cent reduction. CMHC also announced a full waiver of premiums for rental housing projects on April 22nd 2005. These premium reductions have been of direct benefit to Canadian consumers.
While the homeownership rate in Canada has risen over the last decade to 67 per cent, the overall rate masks a drop in the rate for younger age groups. According to research by the Vanier Institute for the Family, the homeownership rate for Canadians under age 35 dropped from 44 per cent in 1981 to 41 per cent in 2001. A rise in ownership for Canadians aged 55 and older to 74 per cent produces the healthy overall ownership rate.
As this research shows, first-time homebuyers continue to struggle to realize their dreams of homeownership. Consideration must be given to whether younger potential buyers are better off with the current system, which has facilitated very low down payments and a range of options, before any changes are made.
For many in the younger age groups, mortgage financing is a major issue of homeownership. Saving for a down payment continues to be a major challenge for younger buyers. As well, some individuals prefer not to be highly leveraged, and they are prepared to save to avoid large debt and financing charges.
CREA notes that there are a number of aspects of Canadian public policy that contribute to the cost of homeownership - not just mortgage insurance. Interest rates, for example, are a much more decisive factor in mortgage financing than insurance premiums. This is why CREA has always advocated fiscal policies that can underpin stable low interest rates.
Consumers currently have the power to access a range of flexible options and have the ability to select the alternative that best suits their individual needs. CREA believes that more study of the consequences of changing the statutory restriction is required before such a change is considered.
Most housing stakeholders, from REALTORS® to home builders to mortgage lenders to mortgage insurers, agree that Canada has one of the most dynamic housing environments in the world, and that consumers benefit from a high degree of competition.
CREA firmly believes that changing the statutory requirement would be ill advised, and could result in a negative impact on the housing environment. As such, no changes should be made to those provisions of the Act.
Commercial Investment Powers
The government is seeking views on expanding the power of financial institutions to invest in commercial entities and undertake commercial activities, subject to the appropriate policy and prudential safeguards.
The Canadian Real Estate Association believes the proposal to expand the investment powers of financial institutions fails to achieve any of the three principal goals outlined in the consultation document-to enhance the interests of consumers, increase legislative and regulatory efficiency, and adapt the framework to new developments.
The Association has strong concerns with the potential expansion of banks into real estate brokerage. Brokerages are independent businesses that present a multitude of service offerings from the simple minimum-service discount-fee marketing service, to the more traditional full-service brokerage offering.
CREA also calls into question the following statement in the consultation document: "For example, banks were permitted to invest in real estate and real estate brokerage entities in 1991, and more recently were given expanded investment power in information technology activities, both areas being integral to the operation of banking networks."
The Association does not believe the ability of the banks to invest in real estate brokerage entities is integral to the operation of banking networks. CREA does not understand how an activity that the banks have not pursued - even though they have the ability to do so - can be considered to be integral to their operations.
The proposal also raises new issues for REALTORS® about what the "appropriate policy and prudential safeguards" might be.
No demand from banks or consumers
CREA has monitored the interest of financial institutions in exercising their right to invest in real estate and real estate brokerages since the power was granted in 1991. While there has always been some interest in investing in real estate, there has been little or no expressed interest on the part of banks to enter the brokerage business. There has also been no demand for this policy change on the part of Canadian consumers.
The Canadian banking industry has not been reticent to advance its own interests in terms of the international environment. For many years, banks have argued for the right to merge to help them compete internationally. It seems curious to CREA that while the government first denied the banks the right to merge, and has more recently deferred action on that issue, it is currently encouraging the banks to consider moving into a field in which there has been little or no interest.
CREA submits that the question of expanding commercial investment powers should be removed from the current review and deferred until the matter of Canadian bank mergers is ultimately resolved, as mergers will have a profound impact on all of the principal goals that the current review is examining.
Canadian Real Estate Industry is Robust and Competitive
The organized real estate industry in Canada is robust, competitive and experienced. These defining characteristics continue to serve the Canadian marketplace and consumers well.
There are more than 10,000 brokerages operating across Canada today. Seventy-two per cent of Brokers in Canada have more than ten years of experience. The majority of brokerages (65 per cent) are small companies that employ between one and 10 individuals.
With this widespread competitive profile, and a proven track record of customer satisfaction and sales success, CREA does not understand why the Department of Finance is encouraging Canada's largest financial institutions to expand into this area.
Issue unresolved in the U.S.
The proposals to expand the commercial investment power of Canadian financial institutions is presented in the consultation document in the context of ensuring that the existing framework remains current and up-to-date with events and developments in the global environment.
The entry of banks into the brokerage business has been of great concern to REALTORS® in the United States. A similar regulatory proposal has been in play in the United States since 1999, and remains unresolved. The U.S. banks have been actively pursuing the ability to own brokerages while most of the U.S. real estate industry opposes the change. With the issue unresolved in the U.S., it is difficult to argue that Canada should change to be "up-to-date" internationally.
The National Association of REALTORS® (NAR), with which The Canadian Real Estate Association maintains a fraternal relationship, believes that the longstanding policy of separating finance and commerce should be upheld.
NAR says that under the proposed change, financial holding companies and subsidiaries with direct and indirect federal subsidies will compete unfairly with real estate firms and their affiliates by cross-subsidizing banking and financial operations
NAR also has concerns that such a change would increase the prospect of compromised bank lending decisions and conflicts of interest while restricting consumer choices and competition among mortgage lenders. In addition, NAR suggests that if the change took place, the activities of real estate Brokers and managers would be considered financial in nature, and thus subject to increased regulation by the Federal Reserve, Treasury Department and the Federal Trade Commission. This increased regulatory burden could involve privacy regulations, financial solvency, and reporting requirements.
The concerns raised by REALTORS® in the United States are shared by REALTORS® in Canada. CREA will strongly oppose any expansion of bank powers into real estate brokerage in Canada.
Commercial Investment Powers of Banks
The question of expanding commercial investment powers should be removed from the current review and deferred until the matters of Canadian bank mergers is ultimately resolved. Mergers will have a profound impact on all of the principal goals that the current review is examining.
With this kind of widespread competitive profile in the brokerage business, and with this track record of customer satisfaction, and sales success, CREA is at a loss to understand why the Department is encouraging Canada's largest financial institutions to enter a healthy, consumer-focused, and competitive brokerage industry.
CREA will strongly oppose any expansion of bank powers into real estate brokerage.