Canada’s banking regulator has raised concerns with major lenders over mortgage appraisal practices linked to condominium purchases, highlighting potential risks to financial stability as the country’s housing market faces a prolonged price correction.
Minutes from a meeting between the Office of the Superintendent of Financial Institutions (OSFI) and chief risk officers at major banks show that regulators warned lenders about the widespread use of so-called blanket appraisals when approving mortgages for pre-construction condominiums. The practice involves valuing a property based on its price when the buyer initially agrees to the purchase rather than reassessing its market value when the property transaction closes.
The regulator indicated that this approach could conflict with federal mortgage rules requiring uninsured loans to remain below 80 per cent of the property’s market value at the time of closing. If property prices decline between the initial agreement and completion, loans based on earlier valuations could exceed that threshold, potentially breaching provisions of the Bank Act.
The warning comes as Canada’s housing market undergoes one of the sharpest price corrections among major global economies. Property prices declined by 2.7 per cent last year, as economic uncertainty linked to US trade conditions and slower immigration reduced demand for housing. The condominium segment has been particularly affected, with pre-construction property prices falling by between 10 and 30 per cent from their peak levels.
The downturn has left thousands of newly built units unsold in major urban centres such as Toronto and Vancouver, following a construction surge between 2018 and 2022 driven by investor demand. Falling prices raise the possibility that some buyers may abandon purchases or default on loans for properties now valued below their original purchase prices.
Regulators have also examined marketing practices tied to pre-construction mortgages. At a subsequent meeting, OSFI highlighted promotional language used by a lender that suggested borrowers would remain approved for financing until their closing date. Royal Bank of Canada later revised the wording on its website, removing references to approvals being guaranteed until completion and stating instead that mortgage approvals are based on the builder’s projected closing date.
The regulator has not publicly identified specific institutions involved in the discussions. However, industry groups including the Canadian Bankers Association have said they are continuing discussions with OSFI to clarify expectations around appraisal practices used during the pre-construction stage of mortgage lending.
