Why Canada’s Condo “Insurance Crisis” Should Make Investors Nervous

Canadian condo investors are facing another risk – rising insurance premiums. The event, which the industry is calling the “condo coverage crisis,” saw premiums rise at the end of last year. This trend of higher rates is expected to persist into the future, as replacement values and insurance demand continue to rise. The rising premiums translate into higher maintenance fees, lowering the attractiveness to investors. Here’s a quick explainer on what owners will be talking about in the not so distant future.

Supply and Demand For Insurance

Insurance rates are subject to supply and demand, just like many other products. If demand is soft for a product, the industry tends to charge lower premiums and have higher coverage. If demand is strong, the cost of premiums will increase and coverage size is often lowered. Pretty straightforward so far, right? 

Canada’s construction boom has increased the number of condo apartments rapidly. This has led to a serious increase in demand for insurance coverage. There’s also a near-record amount of completions expected to drive demand further. This surge in demand was already expected to place a strain on the existing market. However, many companies have decided to exit the segment of insurance. This has led to less competition at a period of surging demand. Still with me?

Rising Costs Are Sending Insurers Packing

Typically rising demand for a product invites more players to a game. Not this time. Due to rising replacement values and more claims, the market is now less attractive. Fewer insurers want to deal with condos, when other segments are more profitable. Already rapidly rising replacement costs rise even faster during a construction boom. It also places a strain on labour, sending wages higher. In short, it’s the perfect recipe to demolish margins. Combine that with an increase in climate related damage claims, and it’s not exactly a lucrative market insurers want to chase. 

This Is Already Making Condo Fees Higher, and It Will Continue

People have a short memory, and seem to think Canada has always been building condos on every corner. In reality, this trend only really started in 2016-2017, with a near record number of condos currently under construction. As insurance rates renew, and new buildings become insured –  the hikes are going to hit the owners. 

In BC, some renewals are already adding hundreds to costs. One condo apartment saw its insurance rate rise from $66,000 in 2019 to $588,000 in 2020. The 790% increase translated into a one-time fee of $3,000 per unit, in addition to an extra monthly cost of $600. Overall, it’s estimated BC condo apartments have received an average increase of 40% over the past few years, and are forecasted to rise. The BC government recently discussed legislation that would require advanced notice of changes, but that doesn’t really address the lack of options. 

The trend was most widely discussed in BC at the end of last year, when maintenance fees are already sky high. Industry experts have noticed this trend emerging in other regions already, and expect it to become a wider issue soon. 

Rising condo insurance premiums are largely a BC discussion, but it’s a national issue. It’s most obvious in BC, where home prices have been at crisis levels for years. In cities like Toronto though, maintenance fees are starting to climb to levels that are similar to rent just a few years ago. Experts believe the trend will become a national issue, in the not so distant future. With these climbing insurance premiums, come higher maintenance fees. Rising fees tend to lower investment cap rates, or make the units less attractive to purchase. That can be problematic in cities like Toronto, where it’s become normal for investors to subsidize their tenant’s rent.

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  • Jamie Cass 4 years ago

    Detached insurance is going up too, but not as much as condo insurance is my understanding. The problem with sharing a building of people that are investors, are their tenant doesn’t really know (or care) how to take care of the unit.

    I believe water damage is the number one claim.

  • Trader Jim 4 years ago

    Surprised you didn’t show the condo project you shared on Twitter, where the mortgage payments would be equal to the maintenance, and taxes. Technically, I don’t even think that can be financed. haha

  • SH 4 years ago

    I can’t wait for the Trudeau government to intervene to cap insurance rates and bail out RE speculators yet again.

  • fred 4 years ago

    Thanks to bank of Canada , every thing is going up. In last six months most of products are up %30 to %50 and still inflation is below %2

    • michael yates 4 years ago

      Well, clearly inflation is not 2%.

      There’s this thing called “lying” and governments do it pretty much constantly, especially with official data.

    • tdawg 4 years ago

      Yes “below” 😉

  • Smokva 4 years ago

    I’m surprised this has not been a bigger concern the past couple of years. I’m in the commercial insurance space and we have been experiencing a hardening market for all industries, but property is a different game since Fort McMurray. The largest insurance catastrophe in Canadian history. This, along with water damage being the new fire, changes in our climate, etc. it’s become a very undesirable, risky and unprofitable business for insurance companies. Many of them have opted out of the market completely and those who are left, well, we are in the palm of their hands.

    Insurers are not showing any mercy either with COVID19 and it is unlikely for premiums to go back to what they were before. Property hikes will be here for the long run and it is a recipe for disaster for condo owners, particularly with renters leaving Toronto.

  • Fight Back 4 years ago

    Guys, for those of you who cant afford a to buy a home or have to buy a significantly lower standard of home because of the real estate bubble a question.

    If a violent gang of criminals goes on a rampage and stab wound and stole millions from Canadians would you blame the government for doing nothing to stop them?

    So now this real estate bubble made millions of Canadians lives miserable, force people into debt which drains spending and cresting tons of social problems. Is it not like a criminal gang that steals and stabs people? Why aren’t we holding the government for doing nothing?

  • fred 4 years ago

    Macklem puts ‘dangerously over-leveraged’ Canadians on notice
    It is funny they are the cause of it and they give warning too.
    I might be joe s fault.

  • Brent 4 years ago

    These maintenance fees, which include insurance, really torpedo any positives of owing a Condo as an income generating investment. Those who have bought and sold with cap gains have been really lucky speculators, and should thank our government and central bank for all the support.

  • fred 4 years ago

    Bank of Canada is going to negative mortgage rate to save the condo market.

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