Developers and banks scramble to offer financing solutions as buyers struggle to secure mortgages
Toronto’s preconstruction condo market is facing a crisis, with buyers abandoning their purchases as appraisals come in significantly below their original contract prices.
The fallout from record-high condo sales in 2021 is now playing out as buildings near completion, leaving many buyers unable, or unwilling, to bridge the financing gaps.
Joe Baradziej is one of those buyers. During the real estate boom in late 2020, he agreed to buy a $2.195-million preconstruction condo in Leaside, midtown Toronto, and put down a $439,000 deposit, the equivalent of 20% of the purchase price. His two-bedroom unit in an eight-floor luxury building was set to be a prime investment or future home.
But by fall 2024, as the project neared completion, an appraisal valued his unit at just $1.6 million – 27% less than his original contract price. That meant he would have had to cover a $595,000 shortfall to close on the property.
Since lenders only finance based on appraised value, Baradziej had to make a tough decision: find additional funds, refinance his current home, or walk away. In the end, he chose to forfeit his deposit.
“It comes down to simple math,” Baradziej told The Globe and Mail. “By me walking away, I am saving money.”
The developer, Gairloch, partnered with RBC to offer a blanket appraisal program, which would allow buyers to secure financing based on their original purchase price rather than the lower appraised value. But Baradziej declined.
“I wasn’t financially comfortable to take a mortgage out against a value I know isn’t real,” he said. “I won’t do it.”
Widespread problem
Baradziej’s situation is part of a larger trend across Toronto’s condo market, where preconstruction buyers are facing steep appraisal shortfalls. Many Toronto buyers who locked in preconstruction purchases years ago are now facing appraisals that are 10% to 30% below their original purchase price.
According to Lorenzo Presutti, an appraiser at Sharp Appraisal, the market has seen an unprecedented drop in preconstruction values.
“I haven’t seen this much of a drop in value,” said Presutti, who has appraised Toronto condos for more than 20 years. His firm evaluated around 100 preconstruction condos in 2024, all showing similar trends.
The issue isn’t limited to high-end condos. In one case, a 535-square-foot one-bedroom unit at 55 Charles St. East, purchased for $850,000 in January 2020, was appraised at just $700,000 when the building was completed in 2024.
The discrepancy between original purchase prices and current market values is creating financing gaps that many buyers cannot afford to cover. If they fail to close, they lose their deposit and could even face legal action from developers for breaching their contracts.
Why condo appraisals are coming in low
The decline in preconstruction values is largely a result of shifting market conditions. Since 2021, the Bank of Canada has aggressively raised interest rates, cooling the real estate market and making mortgage financing significantly more expensive. At the same time, demand for preconstruction condos has plummeted, with investors, who once dominated the sector, largely stepping back due to weaker profit potential.
The number of completed condo units in the Toronto and Hamilton area hit a record 29,800 in 2024, according to Urbanation Inc., with even more supply expected in 2025. Developers are set to finish construction on 30,793 condo units this year, further flooding the market with inventory at a time when buyer interest has waned.
The growing supply has placed downward pressure on condo values, leaving many buyers with properties worth far less than they originally agreed to pay.
Developers, banks offer solutions
Faced with a wave of potential buyer defaults, developers are working with lenders to provide more flexible financing solutions. Gairloch, for instance, arranged with RBC to offer all purchasers in Baradziej’s building an appraisal-based financing option tied to their original purchase prices.
RBC gave all their purchasers in the building appraisals and financing options based on their original purchase price, according to Mike Rivait, Gairloch’s director of sales and marketing. He also claimed that no other buyers in the building had issues with appraisal values or financing.
RBC defended its appraisal approach, stating that it assesses market conditions at specific points in time and monitors trends to reassess blanket appraisals when necessary.
“We continuously monitor market conditions and may reassess a blanket appraisal where circumstances warrant,” said Leah Robinson, RBC’s vice president of home equity financing policy and regulatory management.
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Still, some buyers remain wary of taking on mortgages that exceed the current market value of their units.
As preconstruction buyers navigate these challenges, some are relying on financial help from family, turning to private lenders, or renting out their units despite operating at a loss. Even those who manage to close often find that rental income is not enough to cover mortgage payments and condo fees, leading to further financial strain.
Industry experts believe that the era of preconstruction condos as a surefire investment is over – at least for now.
“Buying a preconstruction condo was such a safe thing to do,” said Damian Guiducci, director of business development for Home Value Inc. Appraisal. “Now things have hit the wall, and these are the repercussions.”
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