The impact of Canada’s condo market downturn on scores of homebuyers and investors is, by this stage, well-known: plummeting property values, appraisal crises, cashflow nightmares and sometimes legal woes.
Those trends are showing no sign of fading – but even with few experts expecting a quick end to the condo market’s slide, especially in Toronto, they still don’t appear likely to plunge Canada’s major lenders into turmoil.
That’s because while the market’s crash has grabbed headlines over the past two years and caused sharp pain for many buyers, the condo sector represents just a tiny slice of the Big Six’s overall loan portfolio, a new report by DBRS Morningstar has highlighted.
Condo developer loans accounted for less than 1% of at least five of the country’s main six lenders’ total portfolios in the fourth quarter, the credit ratings agency said, with Royal Bank of Canada’s (RBC) exposure undisclosed.
And even specifically within the lenders’ commercial real estate portfolios, condo developer exposure is highly limited: it accounts for 4% of the Bank of Montreal’s (BMO) CRE portfolio, for instance, and 6% at Scotiabank. TD’s sits at just 3%, while at National Bank of Canada (NBC) it’s somewhere lower than 2.7%.
That means the current downturn almost certainly won’t trigger a meltdown among Canada’s banking giants, even if the crisis still has some way to run.
“It’s hard to overstate just how big and diversified those banks really are,” Josh Veenkamp, assistant vice president, North American financial institution ratings at Morningstar, told Canadian Mortgage Professional.
Still, that’s not to say lenders across the board will emerge unscathed. Morningstar’s report noted the potential for steeper losses among lenders which, unlike the major banks, have more exposure to condo developers – and specifically, smaller ones.
The banking giants tend to focus on “larger, higher-quality developers” in their condo sector lending. But while it’s unclear how much other lenders have pumped into condo developers, Morningstar sees a good chance of higher exposure among some companies.
“We believe there are likely some private non-bank lenders with high concentration in the space,” its report said, “but note that the Canadian financial institutions within our rated universe are generally well diversified and do not have outsized exposure to condo land development and construction.”
In contrast with larger firms, smaller developers face potentially greater risk from the condo crisis because they usually have less liquidity and greater reliance on external funding, making it more difficult to absorb the shock of a regressing market.
Resale market gathers ground even amid new-condo slump
Some good news amid the doom and gloom for Toronto’s condo sector: the resale market has seemingly stabilized even if the new-condo market continues to tank, with price discounts helping spur an uptick in activity.
That’s a plus for homeowners struggling to pay their current mortgage who may be considering selling their property – and Morningstar also highlighted a truth about condo prices that’s surprising considering how much attention the downturn has commanded in recent years.
Specifically, that’s the fact that Canada-wide, condo prices have actually fallen by less since their 2022 highs than the composite of all housing types – perhaps the most surprising finding from the report, according to Veenkamp.
“It’s not a huge surprise – but the condo prices actually came down slightly less than the broader composite came down,” he said. “So that is interesting, and different than what you would probably see more generally.”
Don’t expect a bounceback
But Morningstar still sees project cancellations and lower construction activity continuing in the near term, and smaller developers and lenders feeling further strain, with an uncertain timeline for the market’s recovery.
And plenty of buyers are still sitting on the sidelines, deterred by economic uncertainty and affordability issues, according to Rates.ca mortgage and real estate expert Victor Tran.
He said other costs like condo fees and insurance are also denting people’s ability to afford a home, even if prices have recently dropped in Toronto.
“Once we add all of those things together, even if the purchase price is a little bit less now, it’s still really challenging for a lot of people,” Tran told CMP.
CMP
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