Finance, Insurance, Real Estate & Leasing (FIRE)

A long history of lending, borrowing...

Banking, in one form or another, has existed as far back as ancient times, when temples were the safest place to store valuables. There are records of merchants who obtained loans from temple priests in Babylon as early as the 18th century BC. As well, Greek temples made loans, accepted deposits, exchanged currency, validated coinage, and even offered credit to merchants. Interest was charged on loans and paid on deposits in ancient Rome.

The Canadian bank rate is at its lowest level in more than 74 years

It is not known how much interest priests charged borrowers in ancient Babylon, but in Canada, the official bank rate is set by a central agency, the Bank of Canada. It’s the rate that the Bank charges its best borrowers (usually commercial banks), and is currently at its lowest level since at least 1935, after being significantly reduced in an effort to provide a boost to the economy.

...investing and speculating

Trading in debts, commodities, and government securities began in the middle ages. In 1602, the Dutch East India Company became the first company to issue stocks and bonds. Stock market activities were sometimes risky. During the tulip mania of the 1630s, speculators purchasing options on the exchange drove the cost of a single tulip bulb up to the equivalent of about $76,000. Many of these speculators were bankrupted when bulb prices eventually declined.

Stock market speculation during the early 1700s left Britain 10 million pounds in debt. The stock market crash of 1929 is widely held to have contributed to the Great Depression. More recently, the current economic slowdown is strongly linked to chaos in financial markets which led to the failure of a number of well-established companies, and helped produce a global recession.

But in between the trading frenzies and inevitable crashes, stock markets have worked as a mechanism by which companies get access to the funds they need to operate and expand their businesses. At the same time, investors who are willing to accept a certain amount of risk have the opportunity to benefit from the growth and development of these businesses.

Despite losses in late 2008, the Toronto Stock Price Index is still higher than it was in 2003

The ups and downs of the stock market are followed with great interest and sometimes, with great anxiety. Since the end of 2008, the market has lost a great deal of momentum and the value of stocks and mutual funds has plummeted. There are some indications that a recovery is underway, but the recent plunge has been dramatic. Despite all the losses, the overall value of stocks traded on the Toronto Stock Exchange remains higher than it was after the economic downturn at the beginning of the decade.

Lloyd’s of London began insuring ships in the 1600s

Although some forms of insurance were available in medieval times, the insurance business has its roots in 1680s London, when Edward Lloyd’s coffee-house became a meeting place where ship owners, captains, and merchants could get the latest shipping news, and where the business of underwriting shipping ventures began. Lloyd’s of London still operates as an insurance underwriter.

In BC, the industry has only been around for about 150 years

British Columbia’s finance, insurance, real estate & leasing (FIRE) industry does not have a long history. The early settlers (and the Aboriginals before them) didn’t have much need for cash, since most goods were exchanged by barter and coins were hard to come by. A small amount of English silver and gold was sent to BC in 1861 and, together with American coins, these were in use until the province joined confederation and adopted the Canadian currency.

As the population grew, branch offices of the big banks were eventually opened. The first credit union, born in reaction to the hardships of the Great Depression, opened its doors in South Burnaby in 1936. Credit union membership in BC now surpasses 1.5 million.

What's included in finance, insurance, real estate & leasing?

All types of banks and banking institutions, from the Bank of Canada and the big chartered banks to local credit unions, are part of the finance & insurance component of this industry. Consumer loan, mortgage, and credit card companies, investment companies, stock and commodity exchanges and brokerages are also included, as are pension funds, trusts, and similar financial vehicles. The group also includes insurance underwriters, agents, and brokers.

One in three workers in FIRE is employed in banking & financial services

The real estate, rental & leasing component of the industry includes establishments that rent or lease housing, non-residential buildings and other property, sell real estate on a fee for commission basis, and rent or lease vehicles, computers, consumer goods, and industrial machinery & equipment. It also includes establishments that manage or operate buildings—from apartments to office towers and shopping malls.

What's happened since 1990?

FIRE is an important industry in BC. Although it employs just 6% of the province‘s workforce, its contribution to BC’s economy is much greater. In fact, it generates nearly a quarter (24%) of the province’s GDP, considerably more than any other industry.

The industry’s share of employment has fallen slightly, but its contribution to GDP is rising

The industry’s share of employment has fallen slightly since 1990, but its share of total GDP has risen from 20% to 24%, largely because imputed rental income has been growing faster than the economy as a whole. The GDP generated by market-based financial, insurance and real estate services has shown slower growth.

How can 6% of the workforce produce nearly a quarter of the province’s total GDP?

The discrepancy between the industry’s share of employment and its contribution to GDP may seem puzzling, but there are some factors that help explain the large, and growing, gap between the two measures. The most important reason for the gap is that the industry’s GDP includes an estimate of the imputed rental income on owner occupied housing. This is the potential income that homeowners could get if they rented out their residence instead of living in it.

Why is this estimate included in GDP? Your home is an asset that has rental value in the marketplace. In economic terms, the benefit you get from living in your house or condo is equal to the amount of rent that you would have to pay for it if you were not the owner. There is no market transaction associated with the use of owner-occupied housing, but paid rent is captured as part of the revenues and GDP of the real estate industry.

Does this matter? Whether people own or rent their homes would not matter as much if the number of renters versus homeowners always stayed the same, or if homeownership was equally common in every economy. However, in order to make comparisons among economies with different characteristics, or to compare the same economy over time, it’s important to ensure that the income generated by the use of an asset such as housing is valued in a consistent way.

Suppose, for example, there was a change in consumer behaviour, so that more people decided to buy, rather than rent, the place they lived in. If this happened, the GDP of the real estate industry would shrink, because less rent would be paid to landlords. Although the stock of housing would still be producing services, the value of those services would not be reflected in a market transaction. The economy would appear to be contracting simply because consumer preferences had changed. However, because imputed rent is included in GDP, the decline in the real estate industry would be offset by an increase in the imputed rental income on owner-occupied housing.

Thus, the value associated with the use of housing, whether owner or tenant-occupied, is always reflected in total GDP. A consistent yardstick is used, so it is possible to make valid comparisons over time or among economies.

Imputed rental income is a significant factor, accounting for nearly 12% of BC’s total GDP. However, there are no jobs associated with this imputed value, and that is one of the reasons for the big gap between GDP and employment in FIRE.

But it doesn’t explain all of the difference. Even when imputed rental income is excluded, the FIRE industry’s share of GDP (12%) is still about twice its share of total employment. The output per worker in FIRE is higher than in other industries, largely because of the extent to which computer and other technologies are used to produce financial and insurance services.

Technological changes have reduced the financial services industry’s need for front-line workers

Banking used to involve mainly face-to-face transactions. Thirty years ago, customers who wanted access to their funds would have to visit a bank or credit union during normal banking hours (usually from Monday to Friday, between 10 a.m. and 3 p.m.). Employees usually received a paycheque on payday, which they would then cash at a bank or credit union. Tourists and business travellers had to use cre