Canadian Condo Buyers At The Beginning Of The Pandemic Now Nearly Underwater: But not in Montreal!
28 Oct 2020
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.
| Region | Percent |
|---|---|
| Ottawa | 61.62 |
| Montreal | -11.66 |
| Calgary | -33.51 |
| Aggregate | -78 |
| Edmonton | -78.09 |
| Fraser Valley | -80.82 |
| Vancouver | -90.77 |
| Toronto | -111.2 |
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.
| Month | Equity |
|---|---|
| Ottawa | 8.79 |
| Montreal | 5.6 |
| Calgary | 4.56 |
| Aggregate | 2.44 |
| Edmonton | 2.43 |
| Fraser Valley | 2.34 |
| Vancouver | 1.81 |
| Toronto | 0.83 |
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.
