For the last five years, there has been an incessant whisper at the margins of the real estate industry that has kept the idea of crashing markets and popped real estate bubbles in the public consciousness. Overextended buyers, overheated markets, overpriced properties \u2013 the reasons for anxiety are real.<\/p>\n
Who would have thought that everything would one day come to a screeching halt because of condo insurance?<\/p>\n
That is the scenario facing British Columbia, where insurance rates for strata corporations have risen beyond what most can afford to pay.<\/p>\n
No lender will finance the purchase of a property lacking insurance, meaning units in uninsured buildings will have to fine either cash buyers or no buyers at all. Condo towers, because of their size and the potential for widespread damage, will be hit especially hard.<\/p>\n
The issue first arose in the fall of 2019, when murmurs of the insurance increases were making their way around the province\u2019s real estate industry.<\/p>\n
\u201cBack then, I don\u2019t think it was on too many people\u2019s radar,\u201d says investor and Pemberton Homes agent Vanessa Roman. \u201cIt\u2019s now on everybody\u2019s radar because more and more buildings have had their insurance come up for renewal. I would say there isn\u2019t a strata corp in BC that isn\u2019t aware of the potential problem.\u201d<\/p>\n
According to Darlene Hyde, CEO of the British Columbia Real Estate Association, the scope of the problem remains hard to gauge.<\/p>\n
\u201cIt\u2019s like the nose of the camel is coming into the tent,\u201d Hyde says. \u201cWe don\u2019t know how big this is going to be. We don\u2019t know how much premiums are going to go up. We\u2019ve heard some individual, anecdotal stories that are pretty scary.\u201d<\/p>\n
One such story involves a property in Abbotsford where Roman says an unfortunate strata corporation saw its premiums rise by 700 percent.<\/p>\n
\u201cLast year, their premiums were $66,000. This year, they\u2019re $588,000 \u2013 just for the premium,\u201d she says.<\/p>\n
Why are condo insurance rates rising in BC?<\/strong><\/p>\n When asking about the root of the issue, the phrase \u201ca perfect storm\u201d frequently pops up. There are multiple reasons behind the spike in insurance rates. Any one of them would be relatively innocuous on its own, like a sliver of light underneath your bedroom door at night. But taken on simultaneously, these factors combine to form an eye-melting flash of lightning that has the potential to set the roof on fire.<\/p>\n Part of the blame can be laid on the strata corporations themselves. In an attempt to attract tenants, many stratas have cut their monthly maintenance fees to paltry levels, resulting in empty coffers when the time comes for major cash outlays, like sudden insurance rate hikes.<\/p>\n Roman says many strata corporations have also tried to keep their own costs low by opting to get insurance from companies offering the lowest rates. These companies, operating in a highly competitive environment, have suppressed normal rate increases for years in an attempt to nab and keep stratas as clients.<\/p>\n \u201cSo everybody wants to pay nothing for this strata,\u201d she says. \u201cWhen you have people on strata councils saying, \u2018Okay, we can go with this insurance provider, or this one, which is 20 percent more but gives us more coverage,\u2019 everyone is like, \u2018Let\u2019s go with the cheaper one. And by the way, we don\u2019t want our rates to go up either.\u2019\u201d<\/p>\n The insurance industry is also playing its part. The suppression of insurance rate increases means strata corporations, rather than gradually spending more each year, are paying for years of below-market increases all at once. And with the global insurance industry having to pay out for unbelievable catastrophes \u2013 the wildfires in Australia alone will cost billions and billions \u2013 those funds will need to be replaced.<\/p>\n What happens next?<\/strong><\/p>\n The current situation is untenable. Its solution remains purely theoretical at this point.<\/p>\n \u201cI think there will be an industry solution or it will be backstopped by the government. It\u2019s too big a problem to ignore,\u201d Hyde says.<\/p>\n Roman suspects that the BC government will either expand the Insurance Corporation of British Columbia\u2019s mandate to cover condos in addition to automobiles or create a new crown corporation to provide condominium insurance.<\/p>\n \u201cBut that\u2019s going to take time to set up. Meanwhile, you\u2019re going to have mortgages that are being renewed, or strata insurance policies that are being renewed and they\u2019re going to have to deal with the ramifications of that,\u201d she says.<\/p>\n Roman expects a massive drop in the value of condos over the next six to seven months. Prospective owners won\u2019t be able to find financing. Any owner of a newly uninsured property who must renew her mortgage will have to either pay the remaining amount in full or sell \u2013 for cash. In a province already plagued by affordability issues, that kind of cash will be in short supply.<\/p>\n \u201cI think you\u2019re going to have a big influx of condos that are selling far, far below market value because they\u2019re not going to be able to be financed. And buyers are going to have to hold onto their properties for a while because we\u2019re going to have the crash, you\u2019re going to have the recovery period and, during that time, you\u2019re probably going to have high monthly strata rates,\u201d Roman explains.<\/p>\n Investors still planning on getting their feet wet in the BC condo space have options for protecting their capital. Roman is advising her clients to get their building\u2019s claims history for the last five years and to find out which claims have gone through the strata corporation\u2019s insurance.<\/p>\n Hyde says the BCREA has already added a clause to the contract of purchase and sale that helps realtors and clients determine the insurance status of the condo they\u2019re looking to buy. The Association is lobbying the Ministry of Municipal Affairs and Housing to create a similar law.<\/p>\n \u201cWe\u2019re hoping the combined forces of industry can find some solutions,\u201d Hyde says, adding that she is anticipating no shortage of constructive dialogue when the Insurance Bureau of Canada hosts the next roundtable meeting of the IBC Commercial Task Force upcoming summit on St. Patrick\u2019s Day.<\/p>\n By then, we might all be ready for a drink.<\/p>\n