Canada's Big Short Moment
The Great condo bailout has arrived, and there’s a lot happening under the hood you need to know.
Last week we learned that Mark Carney, in partnership with David Eby, announced the new Canada-British Columbia Partnership on Condo Conversion. They will leverage “innovative financing tools” to convert more than 2,200 vacant condo units into affordable homes.
“Looking out at condos that have been built, that are unoccupied, that are going to sit there potentially for another couple of years; we are going to go and use the right financing mechanisms and convert those into affordable housing so people can move in and use those,” said Carney.
Adding,
“Developers are stuck. They don’t want to sell at a loss.”
“It is a way to clear off on the books this overhang.”
WTF?
So what do we make of this, besides the obvious moral hazard.
Well, first off, the pre-sale market is on life support. New condo sales are virtually non-existent. After hitting 19,000 sales during the height of the bull market, they dropped to just 2900 last year, and are on track for even fewer this year.
It’s no different in the GTA. New condo sales are running at 40 year lows! And that’s why Doug Ford got his bailout last month. The Ontario plan is a $1.3B public-private fund through the Building Ontario Fund and High Art Capital (the former cannabis guys) to purchase blocks of unsold GTA condo inventory and convert them into roughly 2200 long-term rental units. Once the fund was set up, they partnered with the feds to remove the HST, immediately saving themselves 13% with the stroke of a pen.
The Government is ok with the political backlash because we they know have a really big problem on our hands.
Let’s not forget David Eby got elected campaigning against the Real Estate industry. Now he’s bailing them out!
This is our Big Short Moment.
This is a bailout for developers, but also the banks! Yes, we believe the former banker, Mark Carney, got the tap on the shoulder.
The Banks have massive exposure to the development industry, and that exposure has grown tremendously in recent years.
Why do you think some of the banks have been offering blanket appraisals?
Banks have been offering mortgages to pre-sale buyers using stale appraisals (in some cases, appraisals that are two years old). This is done to maintain the illusion that values have not dropped during the construction period, allowing pre sale buyers to obtain full financing based on the pre-sale purchase price.
Here’s how it works. Imagine a scenario where you bought a pre sale condo for $1M. Construction is nearly complete so you need to get a mortgage and close on the property. However, the market is down and that condo is only worth $800k today. In theory, the banks should only be lending up to 80% loan to value on that $800k value. However, using stale appraisals, they are lending 80% of $1M, which is 100% LTV!
Why would banks do this? Because they are the construction lender on the project and they need these buyers to close otherwise they have an even bigger problem.
Developers are already sitting on unsold units. Typically a developer will hold back about 20% of the condo units during construction. They hold unit backs to try and maximize profits at the end of a project, since prices typically rise during the construction period. It’s also a way to manage risk if you have construction costs overrun.
The problem is prices have not risen during construction. They’ve fallen, and they’ve fallen a lot.
Cue the inventory loan. This is when banks lend to the developer against the value of their unsold condos. As the developer sells off these units, the loan slowly gets repaid.
The banks have a lot of exposure here too.
Like we said, the banks might have had a say in this “developer bailout.”
We find it rather ironic timing that OSFI, the banking regulator, simultaneously lowered the Domestic Stability Buffer for Canada’s big banks from 3.5% to 3.0% of risk-weighted assets, effective June 19, 2026.
In simple terms, it gives the banks more capital flexibility, which can make it easier to absorb bad loans or keep lending while credit losses rise.
Is it a coincidence this is all happening in the midst of a condo bailout? We think not.
There is a crisis brewing. The pre-sale market is completely broken and we’re not through the worst of it yet. More condo projects will be completing soon. More buyers will walk from deposits, and developers will continue accumulating unsold supply.
There’s 4500 vacant and unsold units in Metro Vancouver, and that number is set to rise.
And so, the Eby government, in partnership with the Carney government, are going to take about a third off the units offline, and warehouse them into a rent to own program. I’m not at the leisure of disclosing the name of this rent to own company, but here’s how it works.
This rent-to-own program is marketed as a bridge to homeownership for people who can’t qualify for a mortgage today (red flag). The government buys the home, the resident pays a 2.5% down payment and moves in. The resident still doesn’t own the home but makes monthly rent payments while also paying an additional equity payment on top.
The resident is not just paying rent, they are paying rent plus an equity contribution for a contractual term of 5 years. In 5 years they need to qualify for a mortgage on a purchase price that was contractually agreed upon from the start. The company currently models 5% annual appreciation on their website (red flag).
So if mortgage rates move higher, income doesn’t rise, or the property falls in value, the buyer can end up paying more each month without ever making it to full ownership.
The government is selling this as a feel good story. We are helping people with no down payment get access to the housing ladder. Where have we seen this before?
The reality is, these people are just the exit liquidity for the developers and the bankers, they just hope you’re not smart enough to figure it out.
If we really wanted affordable housing we’d let these unsold condos keep falling in price, or have the government pick them off in bankruptcy.
It’s funny, I was chatting with a large commercial lender this week. They do a good share of inventory loans for new condos. His words, not mine,
“If you want lower prices, speed up the court system. There’s a backlog of insolvencies just waiting to be processed.”
Great post, insolvencies are urgently required to get prices down. I think that between large campaign donors and the “too big to fail dynamics” you are suggesting have resulted in another bailout. Politicians have an unlimited check book and have no issue using it!
The stale appraisals are the detail that should end careers. A bank lending 80% of a $1M valuation on a unit worth $800K is lending at 100% LTV and calling it 80% because the appraisal is two years old. The bank knows the market is down. The buyer knows the market is down. The only thing maintaining the fiction is a piece of paper that hasn't been updated because updating it would force the bank to acknowledge the loss on the construction loan it funded. The appraisal isn't stale by accident. It's stale by design.
The commercial lender's quote at the end tells you everything the rest of the piece is building toward. "If you want lower prices, speed up the court system." The market wants to clear. The insolvencies are sitting in a queue. The government is preventing the clearing because clearing would force the banks to recognise losses they've been deferring with inventory loans, stale appraisals, and now a publicly funded rent-to-own scheme that turns buyers who can't qualify for a mortgage into exit liquidity for developers who can't sell at the price they need. That's not affordable housing. It's a bailout marketed as a social programme.