Canada’s Banking Regulator Tightens Appraisal Rules as Condo Collapse Exposes Collateral Risk
OSFI warned lenders in October that blanket appraisals breach federal law, forcing banks to revalue billions in mortgage assets as Toronto condo prices fall 20% from peak.
Canada’s banking regulator confronted major lenders last October over a widespread practice that allowed them to approve mortgages based on stale property valuations, meeting minutes obtained by Reuters reveal, as the condo market deteriorates further in Greater Toronto and Vancouver.
The intervention by the Office of the Superintendent of Financial Institutions marks a regulatory inflection point: when property appraisals lag market conditions by months or years, banks hold inflated collateral values on their balance sheets, obscuring true capital adequacy just as the housing correction accelerates.
According to meeting minutes seen by Reuters, OSFI warned bank executives that blanket appraisals for condominium mortgages could breach federal mortgage rules, as the regulator scrutinizes practices more closely amid concern over the broad economic impact of a housing market collapse. Blanket appraisals, in which lenders use property values from when buyers agree to purchase rather than at closing, are used to approve loans on multiple units at once, but in falling markets the outdated appraisal increases risk as banks could face higher losses on defaults.
The Appraisal Arbitrage
The mechanics are straightforward. Pre-construction condo buyers agree to purchase units at 2021 or 2022 prices – often $800,000 or more in Toronto – then close three to five years later when the building completes. By that point, according to Wowa.ca, condo apartment average prices have decreased 8.9% year-over-year to $627,000.
Under the Bank Act, federally regulated lenders cannot issue uninsured mortgages exceeding 80% of a property’s market value at closing. But by using blanket appraisals that lock in contract prices rather than current valuations, banks effectively sidestepped that constraint. OSFI warned in the October meeting that the 80% ratio could be breached during blanket appraisals.
The timing gap creates the exposure. OSFI said the blanket appraisal model works well when property values are increasing but is “definitely more challenging when the property market softens”. In a November meeting, OSFI pointed to language used in marketing by large banks, saying the timing of blanket appraisals was a problem, after condo prices had slumped roughly 10% to 20% from their 2022 peak.
Royal Bank of Canada’s pre-construction mortgage website promised buyers would “stay approved until your closing date” as of November 18, according to the Internet Archive, but RBC changed its website after the OSFI meeting, dropping that promise. The Canadian Bankers Association said it is in discussions with OSFI about the regulator’s expectations for blanket appraisals to ensure any possible financial implications are taken into account.
Systemic Risk in Miniature
The dollar amounts involved are modest in aggregate but the precedent is not. According to OSFI, between 2022 and 2024, 1.2% of mortgage originations were for newly built condos, and as of February 2025, 1.4% of all outstanding mortgages were used to fund newly built condo purchases. That translates to roughly $27 billion in outstanding balances across a $1.95 trillion mortgage market.
But the question is not size – it is signal. If appraisal standards slipped for one asset class under regulatory oversight, what else passed through? Within the housing market, the condo segment exhibits the greatest weakness, particularly new multi-unit construction where prices are declining as supply increases, and further declines could negatively impact investor mortgages, drive down collateral values, and reduce investor appetite, according to OSFI’s fall 2025 risk update.
The contagion logic is mechanical. The condo segment exhibits the greatest weakness, and further declines could negatively impact investor mortgages, drive down collateral values, and reduce investor appetite for new multi-family construction projects. That feeds directly into employment in construction – one of Canada’s largest sectors – and into the credit quality of developer loans held by the same banks.
“If prices come down and bring young Canadians in so they can afford it… shouldn’t the market, not the regulator, deal with that?”
– Peter Routledge, Superintendent, OSFI
Capital Rules as Back Door Tightening
OSFI’s public response has been measured. On July 17, 2025, OSFI posted a backgrounder on blanket appraisals and appraisal timing, reinforcing expectations that mortgage lenders establish policies ensuring timely, realistic, and substantiated valuations in accordance with Guideline B-20. But the subtext is clear: get current values, or face capital consequences.
The regulator’s fall risk outlook, published by OSFI, noted continued assessment of adherence to Guideline B-20’s principles on prudent underwriting standards, portfolio management, and account management practices, with close examination of the newly implemented loan-to-income measure. Translation: we are watching everything.
The shift to timely appraisals forces two outcomes. First, it pulls forward recognition of equity shortfalls for borrowers who bought at peak. Some will walk away; most will need mortgage insurance at higher premiums, transferring risk to CMHC and ultimately taxpayers. Second, it increases capital charges for banks on any loans where loan-to-value ratios now exceed 80%. That makes new lending to the segment uneconomical, choking off supply just as the market needs liquidity most.
| Mortgage Type | Delinquency Rate | Year-over-Year Change |
|---|---|---|
| Variable-rate fixed-payment | Higher than average | Increasing |
| Investor mortgages | Higher than average | Increasing |
| Business-for-self | Higher than average | Increasing |
| Toronto condo mortgages | Highest among major centres | Rising fastest |
The Broader Housing Finance Question
If condo valuations proved suspect, what about other segments? Transaction activity in the Canadian housing market remains below 10-year averages, and house prices continue to decline as housing markets in certain geographies experience elevated levels of available-for-sale listings, according to OSFI’s risk update. The regulator is now conducting what amounts to a system-wide audit of collateral values.
This is where OSFI’s intervention crosses from microprudential to macroprudential. The Bank of Canada noted in February 2026 that Toronto’s condos are no longer providing substantial returns for short-term investors because population growth has eased and interest rates have risen, challenging the business models of condo builders. That same dynamic applies to rental properties, which underpin a parallel set of mortgage exposures.
Higher delinquencies are observed in variable-rate fixed-payment mortgages as well as business-for-self and investor mortgage portfolios, with delinquency levels in Toronto continuing to surpass other major centres, and the condo segment exhibiting the greatest weakness, according to OSFI data. These are not randomly distributed stresses – they cluster in precisely the segments where appraisal quality matters most and where lenders have the greatest discretion.
What to Watch
OSFI’s January 2026 quarterly release confirmed that loan-to-income limits lessen the build-up of highly leveraged residential mortgage borrowers, which in turn reduces systemic risk, making the pilot measure permanent. The regulator also announced a six-month consultation on consolidating existing credit risk management guidance for mortgage lending, commercial real estate, and corporate lending into a single principle-based guideline.
That consolidated guideline, expected in mid-2026, will likely enshrine the appraisal standards now being enforced through supervisory letters and closed-door meetings. Watch three indicators: first, bank disclosures of loan-loss provisions on residential mortgages in Q1 and Q2 2026 earnings; second, any uptick in CMHC insurance claims from borrowers unable to meet equity requirements at closing; third, Toronto condo inventory levels – if they continue rising above two years of supply, forced selling becomes probable.
The immediate risk is contained. OSFI Superintendent Peter Routledge estimated blanket appraisals account for just 1.6% of mortgages, and OSFI judges the resilience in the system as sufficient to absorb the potential materialization of key risks. But the regulatory message is unambiguous: the era of lender discretion on valuations is over. In a falling market, that discipline arrives exactly when it hurts most.