Canadian Condo Buyers At The Beginning Of The Pandemic Now Nearly Underwater

First-time homebuyers were warned at the beginning of the pandemic, and a lot didn’t listen. Now some are seeing exactly what the Canada Mortgage and Housing Corporation (CMHC) warned. Canadian Real Estate Association (CREA) condo apartment price data shows a few markets have seen buyers lose a chunk of their down payment. There are some exceptions, but two of the largest condo markets were not.

The Calculations 

Today we’re looking at two calculations, the return on investment on a 5% down payment and estimated equity. The first, assumes a 5% down payment because it’s the demographic the CMHC warned  not to buy. The return is the change in condo prices from April, minus cost of mandatory insurance. This number excludes a number of costs, notably land transfers and closing. Returns are therefore higher than reality in these estimates.

The second number is an estimate of how much equity the condo buyer has remaining. To get this, we’re taking the current benchmark value, and subtracting the mortgage. We then remove principal contribution to the mortgage, factoring a 2% mortgage rate. The result is the estimated equity a condo buyer has, after the above costs with a few months payment.

Why’s this important? Being too broke to sell is a real thing. Buyers only default if they can’t sell in a timely fashion, after a bout of shock. Selling isn’t free, there’s a lot of costs involved – including agent commissions. The higher the value of the mortgage, relative to the value of the home, odds increase the buyer will have to pay to sell. If they can’t afford to sell, the odds of seller default increases.

There’s also additional lifestyle factors that should be considered in this situation. If negative value persists, the buyer may not be building equity with payments. The inability also makes it so the owner is unable to move, if circumstances change. For instance, people with higher mobility tend to see larger income growth. Or if maintenance fees rise sharply, as expected, they need to just take the hit instead of relocating. In this case, the dreams of building equity actually turn into a debt treadmill. 

Canadian Condo Prices Down Slightly, Roughly Half of Equity Kept

A typical condo buyer has lost about three-quarters of their down payment. The change in the price of a typical condo across Canada is down 0.10% from April, about $500 lower. After factoring insurance, this is about 78% of the condo buyer’s down payment lost at this point. When including payments over the period, the condo owner would have retained 2.44% equity. Now there’s no national condo market, but this is important to understand as a base case.

Canadian Condo Down Payment Return

The estimated percent return April Canadian condo owners would have made, with a 5% downpayment.
Source: CREA, Better Dwelling.

Toronto Condo Buyers Down More Than Down Payment

Toronto’s pandemic condo buyers are doing significantly worse at this point. The price of a typical condo has fallen 1.86% from April, or about $11,200. When insurance is included, this works out to negative 111.20% return in equity. In other words, the down payment was wiped out, and then some. When including payments over the period, the owner may have 0.827% equity. This is one of those cases where owners made payments to get barely above water.

Canadian First-Time Homebuyer Equity Estimate

The estimated equity homebuyers that bought a typical condo in April have built, including payments on a mortgage with a 2% rate.
Source: CREA, Better Dwelling.

Vancouver Condo Buyers Down 90% of Down Payment

Vancouver’s pandemic condo buyers are doing better than Toronto, but worse than the rest of the country. The price of a typical condo has fallen 0.77% from April, or about $5,300. When insurance is included, these condo buyers have lost about 90.77% of their down payment. When including payments over the period, the owner is estimated to have 1.81% equity. Not great, but more than twice that of Toronto might feel like winning the lottery.

Montreal Condo Buyers Have About 5.6% Equity

Not all large condo markets did worse, and Montreal is a good example of this. The price of a typical condo increased 3.34% since April, or by about $10,400. When insurance costs are included, this is only a loss of 11.66% of the down payment. Including payments over the period, buyers are estimated to have 5.60% equity. Montreal is the market people think Toronto and Vancouver are. 

Earlier this year, the CMHC warned first-time buyers not to leave just a minimum down payment. While that gives people more flexibility, it only means people are better prepared for losses. If you’re in a market that is seeing things still rise, that’s great. However it’s worth remembering that Toronto and Vancouver tend to lead the market, not follow.

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  • Trader Jim 4 years ago

    Now add maintenance fees. These buyers expecting 20% gains every year don’t realize that’s what you need for this to be a good investment.

  • C.D.R. 4 years ago

    The numbers from CREA and TRREB aren’t even accurate for Toronto.

    Real life sold examples show condo prices have dropped +15% from 2019.
    Some were flippers and others could have been end users who’s circumstances changed.

    Whatever the situation, they’ve lost all equity.

    • Shaun 4 years ago

      Such a big fuss created out of nothing
      Playing the wise over few numbers.. Besides, who pays advance in Aptil and wants to sell now??

      • George 4 years ago

        There’s literally something called the flipper index, with the number of same-unit transactions in a six month period.

        The longer you hold a condo, the less money you make on it. Gains slow, and maintenance racks up. You’re suppose to buy and sell on occupancy, or buy occupancy and sell in a few months.

  • J 4 years ago

    Considering land transfer taxes and future sales commission and land transfer taxes alone, condo buyers with 5% down are already underwater right out of the gate, and significantly so. There doesn’t need to be any price depreciation or consideration of any ownership costs.

    On a $600k condo, standard sales commission with HST is $33,900. Toronto land transfer taxes are $8,475 for a first time buyer ($16,950 otherwise).

    So right off the bat, considering only these two costs with no depreciation, a first time buyer is underwater by $12,375 (-141%). Or $20,850 (-170%) underwater if not a first time buyer.

    Considering a $11,200 drop in value for Toronto condos, these numbers drop to $22,942 (-176%) / $31,417 (-205%).

    And that’s ignoring all other closing costs such as legal fees and all ownership costs.

    Bottom line, if you think you’re in good shape as soon as you close on a condo with a minimal down payment, Brad Lamb is probably your math tutor.

  • fred 4 years ago

    Do not worry Bank of is here to help as they said they have tools, negative interest rate or maybe
    later on help with down payment for condo buyer as they did after election for real estate buyer.

  • SH 4 years ago

    Well the government has decided that condo investors must be insulated from all investment risk at the expense of the country’s middle class and, frankly, at the expense of the country’s soul. I expect more transfers of wealth from wage earners to speculators. Mortgage deferrals might transition into outright mortgage forgiveness and the banks’ losses will be compensated through higher income taxes. And Millennials will keep voting Liberal because they like Trudeau’s hair.

  • Jason 4 years ago

    Prices only go up.

  • UW 4 years ago

    I don’t understand the point of this article. Yes the value has gone down, but FTHB are not primarily buying for price appreciation. So what really matters is what the property value is at the end of their mortgage term.

    Also, if CMHC really cares about the finances of first home buyers as they say they do, why are they still insuring those mortgages? Just let Genworth and Canada Guaranty insure those.

    • Mortgage Guy 4 years ago

      The point is in already inflated markets, the government tried to incentivize buyers to provide investor liquidity.

      > FTHB are not primarily buying for price appreciation.

      Then why buy? Just for the glory of paying more to own the same place than rent? If they waited just a few months, they would have saved almost a year in pay.

      > what really matters is what the property value is at the end of their mortgage term.

      Defaults haven’t started yet. Some people aren’t paying their closing fees, or taking aggressive cuts on assignments to make sure they don’t have to. If you’re already at 0% equity, you need to understand you may be paying months of fees with your ability to exit getting further. If that’s a risk you’re taking, sure. But if you can’t stand that risk, anyone telling you to jump in is just bad advice.

      > Also, if CMHC really cares about the finances of first home buyers as they say they do, why are they still insuring those mortgages? Just let Genworth and Canada Guaranty insure those.

      You clearly don’t understand that Genworth and Canada Guarnty insure those mortgages because they are backstopped by taxpayers. Further, the issue isn’t whether they can provide insurance. It’s the government is trying to use first-time homebuyers as liquidity for investors.

      I didn’t think we would see this in Canada, but this is the strategy they pulled in the US during the 2008 crash. First-time buyers lost years of equity building, because people like you told them don’t worry about it, just so investors could avoid taking a loss.

  • Brian 4 years ago

    What a stupid article. They are talking about being negative 110% but we’re talking $5000-$10 000 down payments.

    Anyone who is panicking over being underwater by $5000 on a real estate investment because the value dropped 1% is out to lunch.

    • James Wilson 4 years ago

      “You only lose money if you sell” were famous last words millions of Americans heard right before entertaining negative equity for over a decade. Rising maintenance fees are also going to be a huge hit to profits as well.

      Paying more to get the same value as rent, minus losing tens of thousands on ownership, is what broke people do, whose only satisfaction is they think they’re better than people that rent.

    • Ethan Wu 4 years ago

      Funny how it goes from, “when you sell you make 200% of your downpayment!” during a bull market, to “losing your whole downpayment is fine.”

      Better update those investment pitches overseas, where they show the 500% gains you can make on your downpayment, with you’re now just helping investors get rid of their junk.

    • Dan Whiting 4 years ago

      I’m not sure in what market a first time purchaser can secure a property with a $5k-10k down payment. In Vancouver, a 5% down payment on the benchmark price for a condo ($683k) is $34k. Show me a first time buyer (in fact, any buyer) that would not consider losing this amount of money a sizable “hit”. And no, it’s not just a paper loss. If those buyers lose their jobs (a realistic possibility at this time) and they have to sell, that money is gone. If they have negative equity when they sell, they will owe their bank money which they likely will not have.

  • Dll 4 years ago

    People need to understand after 10 yrs a condo building will be full of cockroaches and rats. Most buildings will end up as low income housing or airbnb trash units.

    Only a moron would pay mortgage and monthly high maintenance fees for that.

    Condo prices should come down atleast 50%.

  • BDMan 4 years ago

    Only morons need to buy a place to live. I live in a car and save without a mortgage. No rent as well. I’ll be stashing cash until a detach house drops to 200K in the upcoming recession.

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