Condo developers urge big banks to ease presale threshold for financing

Canadian condo developers are pushing banks to lower presale requirements for construction financing from about 70% to 50%, or even 30%-40% in some cases. The current model is contributing to project delays, cancellations, developer defaults, job cuts and weaker condo starts, with Toronto-region presales down more than 90% from their peak and 2024 condo starts at the lowest level since 2010. OSFI says banks can still lend below the more favorable 50% presale threshold, but capital treatment becomes less favorable, limiting flexibility.

Analysis

The key second-order effect is not just “more condo starts,” but a potential re-pricing of credit availability across the entire Canadian housing complex. If banks move from a hard 70% pre-sale hurdle toward a more discretionary 50%/40% framework, the winners are capital-intensive developers with strong land banks and enough balance sheet to survive a longer sell-through cycle; the losers are smaller sponsors who relied on pre-sale scarcity to discipline competition. That shift would likely improve project launch velocity before it improves end-demand, which means near-term supply could recover faster than household formation support, pressuring pricing power in already-soft secondary markets.

For banks, this is a capital efficiency trade rather than a pure volume story. Lower pre-sale thresholds can increase construction-loan growth without proportional balance-sheet usage if OSFI treatment remains favorable, but it also lengthens exposure to mark-to-market risk when project completion lags and absorption weakens. The real risk is a late-cycle “extend and pretend” dynamic: if lenders accept more execution risk now, problem loans may not emerge until 18–36 months later, when projects that started under easier terms are reaching completion into a still-flooded supply pipeline.

The contrarian view is that the market may be over-anchored to condo weakness as a permanent demand problem, when part of the issue is a financing bottleneck. If banks loosen selectively, supply could normalize faster than consensus expects, but not necessarily in condos specifically—capital may migrate toward rental and mixed-use assets where takeout is cleaner and policy support is better. That makes the bigger trade not a simple bullish housing call, but a relative-value bet on lenders and vertically integrated developers versus homebuilders with weaker financing access and high land carrying costs.

Any policy help from Ottawa would be a months-to-years catalyst, not a near-term fix. The immediate catalyst is bank behavior: even a small downgrade from 70% to 50% can unlock a meaningful amount of stalled inventory, but only if buyer sentiment stabilizes enough to keep sales offices open through the next 2-3 selling seasons.

Key Decisions for Investors

• Long Canadian banks with diversified lending books versus Canadian homebuilders: prefer RY/TD over small-cap developers for a 6-12 month horizon; banks gain loan growth and optionality while limiting single-project concentration risk.
• Pair trade: long RY or TD / short a basket of Canada-exposed homebuilders or regional developers if liquid names are available; thesis is that capital relief helps lenders before it meaningfully rescues end-demand, creating a lagged benefit for banks.
• Own upside in rental-oriented real estate operators or REITs over condo-exposed developers for 12-24 months; if capital shifts from condo to rental, policy-supported rental platforms should capture the displaced pipeline first.
• Avoid chasing distressed developer debt until bank underwriting loosens is actually observable in originations; the risk/reward improves only after the first 1-2 quarters of higher construction-loan approvals, not on headlines alone.
• Set a catalyst watch on OSFI/bank disclosure: if pre-sale thresholds are eased materially, consider tactical longs in bank preferreds or subordinated capital where higher lending volumes can accrue with contained equity downside.