In Ontario, consumers who put down a deposit on a new home or condominium are protected by Tarion’s deposit insurance coverage — up to $40,000 for new homes and $20,000 for condominiums — in the event the builder is unable to finish the home.
This protection is one part of the province’s new home warranty program, a package of protections we believe is one of the strongest in the country.
Our model provides a universal standard of coverage that other provincial programs do not offer, including for radon, delayed closing and certain contractual disputes.
Understandably, there has been a lot of conversation recently about the level of deposit protection coverage available in Ontario and whether it is sufficient.
This has no doubt been spurred by two recent events: the collapse of a large GTA-based builder called Urbancorp; and, a review of Tarion by Justice Cunningham.
The result is some healthy discussion about the level of deposit protection currently offered and whether this is the time to increase coverage. Some in the media have even argued for significant increases.
At the heart of this debate, an important question is this: What is the right level of deposit protection for consumers in Ontario?
On the one hand, the new home warranty is intended to give Ontario new home buyers peace-of-mind when purchasing a new home. On the other, the warranty must deliver its protections in a fair and cost-effective way.
For example, increasing deposit coverage from $40,000 to $200,000 on free-hold homes may seem like a reasonable suggestion at first glance. But what if we dig a little deeper?
First, we know from over 40 years of experience that the vast majority of new home purchases are completed without incident. That in no way is intended to dismiss the emotional stress and trauma that purchasers experience when their dreams of new home ownership are torn up along with the purchase agreement. This unfortunate reality happens.
Not often, thank goodness, and not previously on the scale of an Urbancorp. But it happens. This is why deposit protection coverage exists in the first place.
Next, how sufficient are the current levels of coverage? Last year, Tarion reviewed its deposit protection claims data and found that in the five-year period between 2010 and 2014, the average loss on new home deposits was $29,000, well under the current $40,000 limit.
Claims from the GTA area were often higher than the average, but claims outside the GTA were lower. In other words, purchasers in Toronto typically have greater exposure and risk than buyers outside Toronto.
So, what is the appropriate response for a provincial warranty provider? Do we increase protections based on the potential exposure of purchasers from the GTA area or do we maintain a province-wide perspective?
Keep in mind that warranty coverage increases, especially significant increases, would likely have a corresponding impact on enrollment fees.
In this case, all new home consumers in the province could be paying higher enrollment fees based on a heated marketplace in the GTA. Is that fair? (Note: builders actually pay the enrollment fee but this cost is often passed on to new home purchasers).
Before the Urbancorp situation occurred, our position was that the few instances of deposit protection loss — while very unfortunate for the individuals affected — did not justify a province-wide increase in fees.
There are two other points to keep in mind in this discussion. First, Ontario’s warranty program, like anywhere else in the country, is a limited warranty and was never designed to provide absolute protection for any and all losses.
The reason that model doesn’t exist in Canada is that it would simply be cost prohibitive. High enrollment fees could also slow new home sales and with it new home construction — a strong economic driver in this province.
In light of the Urbancorp collapse, we agree that it is important to once again review the deposit protection warranty.
We certainly understand how stressful the past months have been for many Urbancorp purchasers and we are encouraged that the court appointed monitor, a company called KSV, has publicly expressed a high level of confidence that deposits given by all purchasers will likely be recovered.
Of course, some of these purchasers may still lose their dream homes. As well, these purchasers will still have lost the potential equity that would have accrued since they first purchased their yet-to-be-built homes years ago.
In the end, these are unfortunate consequences that flow from insolvency laws and they cannot be changed by a deposit warranty. But we all benefit from the discussion.