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.
