Toronto's Condo Market Is Struggling—And Banks Are Keeping It Afloat

Toronto condo market is under strain since newly built condos are finished at less than buyers paid. To keep the market intact, Canadian banks—including Royal Bank—use a dubious tactic known as "blanket appraisals." This approach lets purchasers get mortgages without paying the difference between the agreed-upon price and the lower current market value.

Given the looming 2025 condo completions, the long-term effects are unknown. More buyers depending on these policies call for greater attention to the broader consequences for financial regulation and housing stability.

Why Toronto's Condo Market Is Struggling

Many of the newly constructed condos in Midtown Toronto are not worth what purchasers first paid. Pre-construction buyers from 2019 or 2020 now find market values 30-40% below their purchase price. Banks are intervening to stop mass defaults even if resale condo prices stagnate via blanket appraisals.
Rising interest rates and economic uncertainty aggravate the situation, making it challenging for buyers to close on their homes without additional financial help.

What Are Blanket Appraisals?

Blanket appraisals let banks evaluate newly constructed condos at the original purchase price rather than their current, lower market value. These produce a zero-down-payment mortgage rather nicely. For instance, the bank issues a $800K mortgage without asking the buyer to pay the $160K difference if a buyer paid $1 million for a condo with a $200,000 deposit and the current value drops to $800,000.

This approach hides the market's value while helping buyers avoid financial difficulty. As these differences arise, it also begs questions regarding the long-term viability of the housing market and whether a future sharp correction may result from them.

How Canadian Banks Are Propping Up the Market

Royal Bank of Canada (RBC) confirmed in a Globe and Mail article that it offers blanket appraisals on new condos. One Leaside buyer had a $595K difference between his $2.2M purchase price and the new $1.6M assessment. Gairloch, the builder, told him RBC was ready to use the original purchase price, enabling him to get financing without covering the difference.  

With this approach, Canadian banks are straying from appraisal guidelines to stop condo prices from declining much more. Such actions raise questions regarding openness and risk management even while they shield bank loan books from quick losses. Banks lower the risk of defaults by keeping higher values on paper, but they may be building long-term weaknesses in the Canadian housing market. (Source - Move Smartly)

The Risks of Blanket Appraisals

While this practice offers short-term relief, it poses profound long-term risks:

If condo prices in Midtown Toronto continue to fall, buyers with blanket appraisals may find themselves underwater—owing more than their properties are worth. This would add more financial burden if they needed to sell or refinish.

Moreover, it raises systematic risk for financial institutions as their mortgage portfolios become more disconnected from current affairs. If economic times get bad, these inflated appraisals could set off a chain reaction of defaults, further lowering the housing market.

Future Outlook for Toronto's Condo Market

Given that more new condos are expected to be built in 2025, the Toronto condo market presents formidable obstacles. Declining values could lead to more foreclosures without intervention; thus, banks would have to face the results of their all-encompassing assessment policies. If the market continues to experience price stagnation or further declines, the financial burden on buyers and lenders could grow exponentially. As legislators try to lower systematic risks and safeguard consumer interests, this could result in more government control.

Furthermore, the long-term viability of these policies is called into question.
As new condos increase, maintaining inflated valuations becomes more difficult. A more noticeable price correction could follow if banks reduce their dependence on blanket appraisals.

Market observers will closely watch how financial institutions and regulators respond to these developments and whether proactive measures can prevent a broader housing market crisis.

Key Takeaways:

• RBC and other prominent Canadian banks are keeping the market afloat by using blanket appraisals, shielding buyers from immediate losses, and protecting their balance sheets from the collapse of condo prices.
• If prices continue to drop, those depending on blanket appraisals could owe more than their condo is worth, leading to financial difficulty and default.
• The market is becoming more unstable as more new condos are completed in 2025; hence, the continuous use of blanket appraisals could have significant financial effects if market conditions worsen.

Final Thoughts

Toronto condo market is still a complex scene where more profound flaws in the Canadian housing market are hidden under financial policies like blanket appraisals. Although these steps provide some respite, they also raise long-term risks that might influence Toronto real estates course for years.

FAQs

1. What is a blanket appraisal?

A blanket appraisal is when a bank values a property at its original purchase price, not its current market value, helping buyers avoid paying the difference.

2. Why are banks using blanket appraisals in Toronto?

Banks use blanket appraisals to prevent mass defaults and keep the condo market stable as new condos are worth less than their pre-construction prices.

3. What risks do blanket appraisals pose to buyers?

Buyers could owe more than their condos are worth if prices drop, making it harder to sell or refinance.

4. How might the condo market change in 2025?

More condo completions in 2025 could lead to falling values, increased foreclosures, and more regulatory scrutiny.