ProductPricingContact
Market DataBlog
Sign inTry it free
← Blog

The Pre-Con Condo Crisis: Banks Are Lending at Prices That Don't Exist

bips team

Pre-Construction Condos Are Worth 75 Cents on the Dollar. Banks Are Lending at Full Price.

If you bought a pre-construction condo in the GTA in 2021 or 2022, there's a good chance it's now worth 10-30% less than what you paid. The unit hasn't even been lived in — and it's already underwater.

But here's where it gets interesting: the same bank that funded the developer is now offering you a mortgage at the original purchase price, not the current appraised value. Why? Because if you walk away, the developer can't repay their construction loan — and the bank is on the hook for hundreds of millions.

This is the story of blanket appraisals, the pre-construction completion wave, and the $85 billion question facing Canadian banks.

The Completion Wave

The GTA is in the middle of the largest condo completion wave in its history. Nearly 30,000 units hit the market in both 2024 and 2025 — roughly 50% above the 10-year average.

Loading chart...

These aren't speculative projects. They were pre-sold during the pandemic boom when prices were at all-time highs, rates were near zero, and investors made up over 50% of buyers. Now those units are completing — and the market has moved against everyone involved.

The Appraisal Gap

When a pre-construction buyer goes to close on their unit, the lender orders an appraisal. If the appraisal comes in below the purchase price, the buyer needs to bridge the difference in cash — on top of their deposit.

According to reporting from the Globe and Mail and MPA Magazine, appraisal shortfalls of 10% to 30% are now common at pre-construction closings in the GTA.

Loading chart...

One documented case: a buyer purchased a unit for $2,195,000. The appraisal came back at $1,600,000 — a $595,000 gap. That's not a down payment shortfall. That's a house.

CMHC data shows Toronto resale condo prices declined 13.4% from 2022 to Q1 2025. The average GTA condo lost $37,000 in value in 2025 alone. For investors who bought at peak, losses of 30-40% are being reported.

Many buyers are simply walking away, forfeiting their 15-20% deposits rather than closing on a unit worth far less than they owe.

Enter the Blanket Appraisal

This is where the story gets uncomfortable.

A blanket appraisal is a financing arrangement where the bank agrees to value a pre-construction property at its original purchase price — not its current market value. The bank appoints a single appraiser who evaluates the entire building, then assigns the contract price as the value for mortgage purposes.

The mechanism is explicitly tied to the bank's construction loan exposure. As one mortgage broker explained to the Toronto Realty Blog:

Banks offer blanket appraisals because they've supplied, say, a $500-million construction loan to a condo builder facing distress. The blanket appraisal converts one big half-a-billion-dollar problem into 100 or 200 smaller problems.

If too many buyers walk away because appraisals come in low, the developer cannot collect final payments, which threatens repayment of the construction loan. By backing mortgages at original prices, the bank ensures the project completes and protects its own developer lending exposure.

The bank would rather hold 200 slightly underwater mortgages than face a single $500M developer default.

Known Examples

RBC is the most prominent bank offering blanket appraisals through its Preferred Builder Program:

  • Gairloch Developments — emailed all buyers that they had "partnered with Royal Bank of Canada to offer a blanket appraisal"
  • CentreCourt — advertised "exclusive full project blanket appraisal with RBC" across five condo towers (March 2024)
  • Sakmet Developments — partnered with RBC for blanket appraisal protection on townhomes in Whitby

What used to be a $50,000 gap between blanket appraisal value and market value is now commonly a $500,000 discrepancy.

How Much Are Banks Exposed?

This is the $85 billion question — literally.

Canadian chartered bank loans to real estate developers reached $85.1 billion in Q1 2025, up 105% from the prior year. Interim construction lending surged to $32.9 billion — up 383% year-over-year.

Loading chart...

Which Banks Are Most Exposed?

Bank-by-bank breakdowns of developer lending aren't fully disclosed, but here's what we know:

| Bank | Known Exposure | |------|----------------| | RBC | Most publicly visible. Preferred Builder Program with blanket appraisals across multiple projects. Canada's largest mortgage book. | | BMO | Named alongside RBC as offering blanket appraisals in industry reports. | | CIBC | Active in development financing. Published research on the condo crisis. | | TD | Published economic research on GTA condo outlook suggesting significant portfolio exposure. | | Scotiabank | Not specifically named in blanket appraisal reporting but part of Big 6 with significant RE lending. | | National Bank | Same as above. |

Four of the Big Six banks set aside over $1 billion each in loan-loss reserves in Q2 2025 (RBC: $1.42B, Scotiabank: $1.4B, TD: $1.34B, BMO: $1.05B). The Big Six collectively provisioned $6.36 billion in a single quarter.

Source: Wealth Professional

The Regulator Is Watching

Canada's banking regulator OSFI published a backgrounder in July 2025 expressing concern about blanket appraisals:

A valuation that did not reflect the current price level at the time of mortgage origination would not meet these expectations.

OSFI warned that outdated appraisals could result in uninsured mortgages exceeding the 80% LTV threshold at origination — a violation of Guideline B-20. But critically, OSFI did not ban the practice. The regulatory posture is cautious monitoring, not prohibition.

Why? Because the alternative — mass buyer defaults triggering developer insolvencies and construction loan losses — is worse.

OSFI's own data shows blanket appraisals affect only 1.2% of mortgage originations nationally (2022-2024). But the practice is heavily concentrated in Toronto and Vancouver, and in the banks that are the dominant construction lenders.

Meanwhile, the Market Has Collapsed

While completions flood the market, new pre-construction sales have fallen off a cliff.

Loading chart...

1,599 new condo sales in the GTA in 2025 — the lowest since 1991. Down 91% from the 10-year average. Only 2 projects launched in Q1 2025, totaling 275 units.

And projects are being cancelled at record rates:

Loading chart...

A record 28 active projects totaling 7,243 units were cancelled in 2025 — more than double the prior year and double the previous record set in 2018.

Toronto vs. Vancouver: The CMHC Data

CMHC published a definitive analysis in June 2025: Condominium Apartment Market Risks in Toronto and Vancouver.

Key takeaways:

  • Toronto sales collapsed 75% from 2022 to Q1 2025
  • Vancouver cancellations increased 10-fold from 2022 to 2024
  • 55% of pre-construction units in Toronto remain unsold
  • Carrying costs are up 24-29% while investor math is deeply negative

The Supply Cliff

Here's the paradox that makes this crisis different from a simple correction: today's distress is creating tomorrow's shortage.

Loading chart...

Construction starts have plunged 88% over three years. The total inventory under construction has fallen to a 10-year low of 50,479 units. By 2028-2029, there will be virtually zero new completions in the GTA.

The Bank of Canada published a staff analytical note in February 2026 confirming a fundamental mismatch: 60% of new supply consists of micro units (3 rooms or fewer), but only 30% of new households match micro-unit profiles.

So we're building the wrong thing, in the wrong quantity, at the wrong price — and then we'll stop building entirely.

What Happens Next

This crisis isn't over. Here's what the data tells us about the next 2-3 years:

2026: Peak pain. Over 22,000 more units are completing this year. These are the last of the pandemic-era projects, and they were sold at the highest prices. The appraisal gaps will get worse before they get better. Expect more blanket appraisals, more cancellations, and more developer receiverships.

2027: The thinning. Completions drop to ~14,000. Developers who survived will be stronger. The weakest projects will have already been cancelled or absorbed. Private lenders who were aggressive in 2021-2022 will be dealing with their own distress as borrowers who used private money to close pre-cons struggle to refinance.

2028-2029: The supply cliff hits. With starts down 88%, virtually no new condos will complete. The same market that has 55% unsold inventory today will have almost no new supply. If immigration and population growth remain anywhere near current levels, prices will recover — potentially sharply. The buyers who managed to close in 2025-2026 (even underwater) will be in a strong position.

The interest rate wildcard. If the Bank of Canada continues cutting rates, the math changes. A 100bps drop in mortgage rates makes every underwater pre-con more affordable to carry. It also brings investors back into the market, absorbing unsold inventory. Conversely, if rates stay elevated, the pain deepens and more buyers walk away.

The regulatory question. OSFI has flagged blanket appraisals but hasn't banned them. If the practice grows or if losses start materializing on these underwater mortgages, expect tighter rules. That could cut off the one mechanism that's preventing mass defaults — which would be worse for everyone.

The Broker Playbook: When Your Client Can't Close

Here's the real scenario: your borrower bought a pre-con condo in 2022 for $800,000. It's now worth $600,000. They have a $120,000 deposit with the developer (15%). They need to close in 60 days. RBC turned them down. What do you do?

Step 1: Check for a blanket appraisal

Before anything else, find out if the developer has a banking relationship that includes a blanket appraisal.

  • Ask the developer's sales office directly. They'll know if RBC, BMO, or another bank is offering blanket appraisals for the project.
  • Ask the developer's lawyer. They coordinate closing logistics and will know which lenders are pre-approved for the building.
  • Check if your client was pre-approved through the developer's preferred lender. If they were, that lender may honour the original purchase price.

If a blanket appraisal exists but the client was declined by that bank (e.g., credit issues, income changes since 2022), your job is to solve the qualification problem — not the appraisal problem. The blanket appraisal removes the LTV issue, so you only need to get them qualified on income and credit.

Step 2: If no blanket appraisal — know the real numbers

Your client needs to understand their actual position:

| Scenario | Purchase: $800K, Value: $600K | |----------|-------------------------------| | Deposit at risk | $120,000 (15% of purchase) | | Mortgage needed (at purchase price) | $680,000 (85% LTV on $800K) | | Actual LTV (at current value) | 113% ($680K / $600K) | | Cash to close at 80% LTV | $200,000 ($800K - $120K deposit - $480K mortgage) | | Cash to close at 65% LTV (B-lender) | $290,000 | | Cost of walking away | $120,000 deposit + potential lawsuit |

The math is ugly. An A-lender won't touch 113% LTV. Even if they could, the stress test at current value makes the income requirement brutal. This is why blanket appraisals exist — without one, the gap is often unbridgeable through conventional channels.

Step 3: The lending ladder

When the A-lender blanket appraisal isn't available, work down the ladder:

B-Lenders (5.5-7.5% range)

  • Some B-lenders will use a more flexible appraisal approach or accept a different appraiser's valuation
  • Extended amortizations (35-40 years) reduce the payment and improve qualification
  • Bank statement income or stated income programs can help self-employed borrowers who lost NOA income during the rate hike period
  • Fee: typically 1% lender fee
  • Best for: clients with the income but not the credit score, or self-employed borrowers who can't show traditional income

Private Lenders (8-12% range)

  • Private lenders focus on equity, not income qualification
  • At 75% current value ($600K), a private lender at 75% LTV would lend $450,000
  • Your client still needs $230,000 cash ($800K - $120K deposit - $450K mortgage) — less than walking away + lawsuit risk, but still steep
  • Term is typically 1 year — the plan has to be: close now, refinance to B or A within 12 months as values stabilize
  • Fee: 2-4% lender fee + broker fee
  • Best for: clients with significant cash or equity in other properties who need to close quickly

Credit Unions

  • Some credit unions have more flexible underwriting guidelines and may not follow OSFI's B-20 stress test for uninsured mortgages
  • They often have local market knowledge and may be more willing to lend on a new condo in their area
  • Worth exploring if the client has an existing relationship

Step 4: Creative structures

When the gap is too large for a single lender:

Vendor Take-Back (VTB) mortgage. The developer provides a second mortgage for part of the gap. The developer would rather take back a $150K second mortgage than lose the sale entirely — especially if they have a construction loan to repay. This requires developer cooperation and their lender's consent, but it's becoming more common in distressed projects.

Family gift or loan. If the client's family can bridge part of the gap, a gifted down payment or family loan can make the numbers work. The first mortgage lender needs to approve this, and gift letters have specific requirements.

HELOC on another property. If the client owns a principal residence or other property with equity, a HELOC can fund the gap. This adds debt service, so it needs to be modeled into GDS/TDS.

Co-signer or guarantor. Adding a co-signer with strong income can solve qualification issues, especially if the blanket appraisal removes the LTV problem but the client's own income doesn't qualify.

Negotiate with the developer. In a distressed market, some developers will:

  • Reduce the purchase price (rare but happening on cancelled-and-relisted units)
  • Extend the closing date (gives time for rates to drop or values to recover)
  • Accept a partial deposit forfeiture + reduced price (developer keeps $50K of the $120K deposit, reduces price by $100K)
  • Offer a payment plan on the deposit balance

Step 5: The walk-away math

Sometimes walking away is the right call. Help your client do the math honestly:

Cost of walking away:

  • Lost deposit: $120,000 (15% of $800K)
  • Developer may sue for damages (the difference between the contract price and what they resell for)
  • Potential credit impact if sued and judgment obtained
  • Total risk: $120K-$320K

Cost of closing underwater:

  • Carrying an $800K mortgage on a $600K asset at, say, 6%: ~$4,800/month
  • Negative equity of $200K that may take 3-5 years to recover
  • But: you own the asset, you're building equity, rates may drop, supply cliff supports future value
  • Total risk: $200K underwater today, but asset may recover

The question your client needs to answer: can they afford to carry the property for 3-5 years while the market recovers? If yes, closing is almost always better than walking away. If they can't carry it for even 6 months, the loss is going to compound.

Step 6: Position for the recovery

For clients who close — underwater or not — the long-term picture matters:

  • Refinance when values recover. If the supply cliff plays out as expected (virtually no new completions by 2028-2029), values should recover within 3-4 years. At that point, refinance out of the expensive private or B-lender mortgage into an A-lender product.
  • Rent it out. If the client bought as an investment and can rent the unit, negative cash flow today may be positive cash flow within 12-18 months if rates continue to drop. Every rate cut improves the math.
  • Don't panic sell into a flooded market. The assignment and resale markets are saturated right now. Selling at the bottom crystallizes the loss. Holding through the supply cliff is the play if they can afford to.

Sources

All data in this article is sourced from publicly available reports:

← Back to all posts