Canada’s banks have dominated Greater Toronto’s investor mortgage market. CIBC data shows the Big Five captured 75% of investor mortgages on condos completed in Toronto in 2023. There’s just one problem-most of those mortgages are cash flow negative—the rent fails to match the payment, property taxes, and maintenance fees on the unit. The Big Five are increasingly backing mortgages on assets with falling prices, and negative cash flow.
Canada’s Big Five Backed 75% of Toronto’s New Condo Investors
Canada’s Big Five banks went all-in on backing new condo investors last year. They funded 75% of mortgage debt for investor-owned condo apartments completed in 2023. That’s an increase of 20-points from a year prior, and it turns out the average has negative cash flow.
Canada’s Big Five Banks Share of Investor Loans Hits 75% In Toronto
Greater Toronto investment condos and average cash flow positions by lender category. For 2023 apartment completions.
Source: Urbanation; Teranet; CIBC.
Mortgages on these properties held by the Big Five were deeply negative cash flow. The cash flow is an average of $359 per month short of actual expenses. About 30% of investor mortgages for completions in 2023 had negative cash flow of $1,000 or more per month. That’s a big problem considering what a large share of units fit this criteria.
Over 3 In 4 Leveraged Investors Were Cash Flow Negative In 2023
As discussed last week, the vast majority of Greater Toronto’s new condo completions are now negative cash flow. Over 3 in 4 (77%) of investor-owned new completions in 2023 were negative cash flow in Toronto. That’s an increase of a massive 25-points, but this isn’t entirely a new thing. Close to half (44%) of newly completed condos owned by leverage investors were negative cash flow as far back as 2017.
That may surprise some, especially since Toronto condos have been quite the windfall for many investors. It’s important to remember that negative cash flow, or negative carry assets, are often an intentional play on the trade value. Many of these investors are speculative landlords (a.k.a. speculords), either betting that rents will surge soon and/or the asset’s value will rise faster. Topping up a rent by $300 per month isn’t that big of a deal if prices are rising $10k/month, right?
What Risk? Toronto Condo Prices Slip, Compounding Leverage Issues
That’s part of the problem. Resale condos saw prices rise a whopping 145% from January 2016 to April 2022. That’s an average of $6,200 per month, making $1,000/month negative cash flow almost enjoyable. It changed when rates began climbing and prices tumbled 13% by June 2024, an average decline of $3,900/month. Not only are these units cash flow negative, but selling would also require taking a loss.
Circling back, that presents a lot of questions about how the Big Five potentially assessed borrower risk. They scrambled to loan capital to speculative plays that were cash flow negative, while the price of these assets are in decline. Are they underwriting these loans with a speculative forecast? It seems to be backed on the assumption that prices and rents will rise due to population growth. However, it’s discounting the fact that prices have pushed households to the point that even Greater Toronto is now seeing residential vacancies rise and rents stall, despite rapid population growth.
The truth finally comes out on why Trudeau can’t let home prices fall. It’s not about the lack of risk, but they need to protect the banks.
Sorry kiddos, you can’t afford shelter because it might impact bank profits.
Might seem like an exaggeration, but it’s spot on.
The obsession with aggregate GDP has to do with debt service levels. If prices fall, GDP falls, as does revenue and their ability to repay debt. The only way to have more affordable houses is via deflationary shock that pushes the price of inputs lower, but no one would do that because then the gov loses its blank cheque.
So let me give you my 2c. First of all, GDP is a nominal measure of productivity. If you increase the Money supply through credit expansion (banks create 97% of all of our money by opriginating loans, mortgages, govt debt, credit cards, car loans and so on), it inherently creates inflation. Why? Well because if you had a M3 of 1.4Trillion Dollars in 2015. In 2000 it was .64Tr. In 2023, it was 3.8Trillion. So in 15 years, it little more than doubled (this included Carneys massive bank bailout in 2009/10), but in 8 years its up 271%?
In 2009 the increase in the money supply caused inflation that was offset by the global finacial crisis, which was causing deflation in most of the world. So in Canada, Carny looked like a genius, because he allowed our banks to keep on lending by giving them hundreds of billions to buy up bad debts.
Skip ahead 15 years and Trudeau never bothered to stop letting banks create money at a 20+% year rate.
So in 2022, when we had a price shock from oil prices in Europe, all that inflationary pressure bleed into the economy. Up to then, it used monetary inflation to offset our dismal GDP growth since 2015 – because all those people who got rich on thier houses spent much of that money, creating
GDP. The problem is, if you are just creating money to lend out to spent on renos, cars, vacations and so on …. it looks like GDP, but its really just stealing future GDP and padding bank profits.
So you are right, eventually if we let Trudeau and Freeland run things for much longer, our credit rating would collapse, and it would cost the govt 10, 15, 20% to borrow. That may still happen, but so far it hasnt. The bigger problem is, housing, car, stock prices are all artificially double the value they should be. So either we let inflation eat away at that, with wages rising so we can afford to do this, or we have a major housing correction, probably one or two of the banks ends up insolvent, and we have our own Trudeau 2.0 recession. All these dingbats who say Trudeau Sr was a good PM seem to forget his dad had the exact same problems. When we finally got rid of him, it took 25 years of pain to clean up the mess he made. So he was a terrible PM, and Jr is at least as bad.
Well obviously Trudeau and Freeland have set up a govt whose main goal is growing the Big 5 banks. Even where the prices rose so quickly under this govt didnt make sense? The high income markets like AB, SK, MB Northern ON, Qc NFLD and the territories didnt really rise, while low income cities like Toronto, Vancouver, Montreal and Ottawa did – also being the stronghold for Liberals in Canada?
So we have banks setting our housing policies, and when it became clear that housing prices were an issue, Freeland and Trudeau kept babbling about supply, eventually wasting another $200B on corporate welfare for housing? So now, of course there is lots of supply …. but prices are still at least 50% overpriced? So clearly supply was never going to fix the prices.
The problem is the momentum now is for housing prices in markets like Toronto, Ottawa, Vancouver to crash. Trudeau is trying to make that the PCs problem when he finally admits he’s done, but the reality is the only way to fix this mess is for banks to get a beating on what has been just pure risk in lending. For anyone to be dumb enough to think a mediocre Rust belt city like Toronto should have prices like NYC, LA and London is an idiot. These are mega cities, where wealth and power is wielded. People live there who can live anywhere. Toronto is a slight imporvement over Cleavland, not as nice as Chicago, Boston or Washington DC, and certainly not worth the money. Ottawa is even less of a housing market, and only showz that Trudeau pays all those civil servants more than double what they are worth.
I love how now-a-days Trudeau is at fault for every thing. Interest rates are up, in line with global norms, Trudeau. There is a housing shortage and all zoning and construction permitting law is controlled by municipalities and provinces, Trudeau. I bought a preconstruction condo for 30% more than the existing resale units in the marketand the price I paid won’t be covered by rental income, Trudeau’s fault of course. I’m sure soon I’ll hear how Trudeau is at fault for Jasper burning down.
I can wait until Poilievre gets elected, we are two years into his term and things haven’t changed. I’m really curious where people will point the finger than? Where will Poilievre direct all that anger he’s riled up. I’m sure people won’t be pinging back at themselves.
One of the main problems with the Trudeau government is that he has no viable path to prosperity. He just gives money to whoever is his vote bank, and calls that investment. This is a dishonest use of language, because investments make you think of future positive returns. Canada is one of the most resource-rich countries in the world, the US economy is humming, yet our per capita GDP keeps falling. Private investment under Trudeau has fallen drastically. Trudeau has scared it off with his rhetoric and increased taxes on the wealthy, capital gains tax increases, etc. That’s in addition to all the individual failures: refusing to build LNG plants to export gas to Europe in 2022 (ALL fossil fuels are bad, even though LNG helped Europe and US reduce emissions), picking a senseless fight with India (I wonder what happened to those potash contracts with India), partnering with China to produce a Covid-19 vaccine (and we know how that turned out), etc. He consistently makes bad economic judgements and even claims to not like economics. There is no word to describe what a moron he is.
What a bunch of morons. American homes are just across the line starting at plus or minus 50K. New houses are less than 400k in most states.
Can’t Trump that but then no sentient person wants to.
So, Adam Smith, the Scottish guy who invented the basic concept of free markets while the world was still a mercantile economy, said very simply, supplyand demand does not set prices for things like food, shelter, health care, and so on. All of these markets require diligent and substantial govt regulation.
If they aren’t regulated, you end up with the Global Financial crisis. Banks creating huge sums of money to lend out to people who literally cant pay the money back, all to pad their profits. This is basically how the Free market business cycle works.
As a result, Most countries have adopted an affordability test to determine how much a person can borrow, and thus control the price of housing as a function of income.
So the govt is effectively able to control housing prices by making rules about how much credit can be extended to a consumer to buy a house. In Canada thats supposed to be 33% of your pre tax income for all housing payments, municipal property taxes and heat. So in Toronto, a condo will run you at least $600/mo for property taxes, maintenance and heat. So that leaves 2200 for the average family in Toronto to spend on housing. That translates to a 330K mortgage, or a 360K purchase price. Currently in the city of Toronto there are about 20 listings for that amount, all of them dated, tiny apartments suitable for 1-2 people.
Even worse, if we go back to 2021, even then the average family could only afford a 450K mortgage, which still only got you a tiny condo? So clearly there was a breakdown here, with predatory lending, and 2009 style profiteering by banks.
Punwasi murdering the narrative this week. Turn the thread on liquidity into an article, because it may have just sparked a shit storm this morning and I am absolutely here for it.
BMO and RBC get downgrades on credit concerns & ultimate liquidity.
https://www.bloomberg.com/news/articles/2024-07-30/bmo-downgraded-price-target-cut-at-rbc-on-us-credit-concerns?embedded-checkout=true
*quick correction. RBC didn’t get the downgrade. It was an RBC anslyst who downgraded BMO price target. Just want to point that out.
Thanks for the link. I hadn’t heard about it until you posted it.
The big issue we saw in 2009 was that credit rating agencies are so far in bed with banks, that they fail to properly access the risks. This is why, credit risks for banks must be assessed by regulators, not ratings agencies, other banks, and so on. Just look at the catastrophic mess in 2009, where pretty much oblivious credit ratings agencies and govt regulators not only ignored the impending collapse, with the exception of 2 investment banks and millions of consumers, there were zero consequences to the GFC for banks, ratings agencies or regulators.
So in Canada, banks are required to stress test for mortgages. This means they not only make sure that people can afford the mortgage now >33% of total income for mortg, condo, prop tax, and heat, so how come this keeps happening?
Obviously turdeau is just a coconspirator in this mess. This is why he’s increased out population by 6M in 8 years (banks are the main beneficiaries of immigration), allowed the chmc to become some sort of research on housing think tank run by bankers, and the BoC have been completely useless in managing credit risk.
Even worse, while parroting on about free market ‘supply’ issues, his govt has done everything in his power to keep housing prices at more than 100% over FMV throughout.
The end will be a massive correction, a bank crisis, and millions who are financially ruined. Clearly turdeau plans to keep hiring and spending in central Canada to try to stay ahead of the collapse. One can almost see him and the rest of his liberal sewer rats laughing at the mess they will leave the next govt?
What needs to happen here is not to ‘manage’ inflation, but to force deflation of housing prices. Yet turdeau and the banks seem to be able to get the BoC to do whatever they want. The problem is with an anemic economy, mainly based of govt spending and consumption, you can’t have your rate at 75-150 no lower than the USA. It will deflate our dollar, and bring even more pain.
It’s time Canadians see that Trudeau, just like his dad, is an existential threat to Canadians who aren’t wealthy liberal backers, and he needs to go now, not in 12 months. I hope Singh will be happy that he allowed this p0s turdeau to continue to kill off the middle class in Canada for another 18mos because Trudeau mailed in partial programs that have failed completely, and will likely be cancelled immediately?
So, Canada’s money supply M3 (which is mainly a function of mortgage, govt and corporate debt growth) when up 165% from 2014 – 2024. Thats about 16% per year. For those of you who do not know what ‘monetary policy’ means (like our PM and FM) it is the management of the M3 by use of overnight rates for banks. The other controls are various capital requirements, rules for affordability (stress tests) and bank regulation by Ottawa. Finally we have govt debt, whihc is also part of the money creations scheme.
So clearly most of those controls have completely failed to manage risk for BANKS, and let them basically underwirte whatever they wanted. By 2022, almost all CHMC insured new mortgages had payments way outside of any stress test/affordability guidelines? This was particularly the case for ‘investors’. The problem is most of these mortgages are actually not the banks problem, they are our problem. Any CHMC insured mortgage is basically guarenteed by the Feds?
So as all these people are quickly in negative equity, if they walk, the taxpayers are paying for it? Even worse, at some point the bakers decided that insured or high ratio mortgages were now lower risk that those with more than 20% down so now they give them a 50bp rate reduction because the Feds are guarenteeing these mortgages?
The worst part is the CHMC, EDC, and other ‘banks’ created by Liberals have massive unfunded liabilities if the GTA housing market collapses? It would be fair to say, a major correction in the ON housing markets could easily double the national debt to $2.8Trillion?
So what we need is a controlled reduction in price, so that housing is affordable again. This means govts, builders, realtors, trades, banks are all going to have to take a big hit. However, if they had done this in 2022, we would be through most of it, but today we are nowhere, and out hundreds of Billions as Trudeau chases votes with big cheques. Also, the primary beneficiaries of all this unfettered immigration is the big banks. Clearly RBC and TD have Trudeaus number ….
Trudeau needs to step in and support these investors to save the Canadian economy.
I wouldn’t worry about the banks, these condos have a lot of equity, probably about 50% LTV. The investors on the other hand will keep seeing their equity drop month after month until they sell at a huge loss.
In the USA, if one holds a mortgage (usually 30 year), at any time you can cancel a high rate mortgage WITHOUT PENALTY, and switch to a lower interest rate mortgage from the same or a different lender.
In Canada, the banks are allowed to penalize early cancelation making it financially unattractive.
If our politicians actually wanted to help financially stressed Canadians, they would force the banks to allow mortgage switching without penalty. Don’t wait for that to happen, the bank lobby matters more than Canadian familys do. Notice how politicians are given plush jobs in the banking sector when then retire or drop out of the political arena. Lisa Raitt is one of many.
Canada is the best one country where basic economic theory doesn’t apply. This is a brand new theory where humans behave irrationally