The Toronto condo market is crashing, but Canada’s top banking watchdog appears to not be losing any sleep over it.
In a press conference Thursday morning, Peter Routledge, the Superintendent of Financial Institutions, conveyed he isn’t too concerned about the impact of the condo crisis on the Big Six banks — despite rising credit costs and delinquencies for both residential and commercial real estate loans.
“While not wishing to minimize the strain and the stress that folks in that market understandably feel, those costs are not presenting a material threat to either earnings or capital in our financial system,” he said.
Indeed, the Big Six just reported earnings that blew past analysts’ expectations. And the banks have accumulated $60 billion in capital reserves — much more than what is required by the regulator — according to the Office of the Superintendent of Financial Institutions (OSFI).
At the same time, this year’s sales of new builds in the Greater Toronto Area are expected to be the worst on record. More developers have been going bust and units are being sold at a loss.
Historically, housing corrections have meant trouble for banks as leveraged clients struggled to repay their loans and pulled back spending.
So how can it be that Canada’s largest lenders have gone practically untouched by a downturn in the condo market akin to the one in the 1990s?
Tania Bourassa-Ochoa, deputy chief economist of Canada Mortgage and Housing Corporation (CMHC), said that while the loss of liquidity in the GTA’s condo market has impacted mortgage delinquencies, the share of people missing payments remains below historical averages.
Since 2016, regulatory changes, such as the introduction of the stress test, have helped contain delinquencies, she said.
Without those changes, “the situation would have potentially been worse.”
Bourassa-Ochoa added that private lenders and mortgage investment entities are more exposed to the condos most at risk of being sold at a loss — those bought around 2022 when housing prices were higher and interest rates were lower — as opposed to the Big Six.
The big banks are also not exposed to risk of defaults by struggling condo developers.
Loans to developers make up a tiny share of the banks’ total loan portfolios, said Josh Veenkamp, analyst at Morningstar DBRS.
“These are loans that are diversified across projects, with clients who are high quality developers with strong liquidity,” said Veenkamp.
BMO’s Canadian condo developer portfolio of $3.1 billion represents only four per cent of total commercial real estate loans, according to the bank’s fourth-quarter investor presentation.
At CIBC, condo developer loans are less then one per cent of the total portfolio.
As well, about 70 per cent of units are typically pre-sold before construction, as opposed to sometimes less than half in the 1980s, helping reduce the risk for developers.
“We are in a better position than in the 90s,” concluded Bourassa-Ochoa, “we are expecting to see some kind of recovery down the road.”
