Housing Recovery? We May Have To Wait…

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Canada’s housing developers are facing intensifying headwinds in 2025 as macroeconomic uncertainty, buyer affordability concerns, and rising trade tensions continue to suppress activity in an already strained market, according to a new commentary by Morningstar DBRS.

Despite ongoing demand driven by a national housing shortage, total housing starts in January and February 2025 fell 5% year-over-year, according to data from the Canada Mortgage and Housing Corporation (CMHC). For years, developers have struggled to surpass 250,000 housing starts annually, even as more than 4 million new residents arrived in Canada over the past five years.

CMHC estimates the country must build an additional 6 million homes by 2030 to restore affordability.

While underlying market fundamentals such as low supply and government growth targets remain favourable in the long term, Morningstar DBRS expects little recovery through the rest of 2025.

“We expect developers will continue to offer higher incentives through most of 2025 to attract buyers looking for affordable options, keeping margins under pressure,” the report stated. “As a result, credit profiles of regional developers are expected to remain under increased operating stress.”

With credit profiles weakening, especially among smaller regional developers lacking scale and diversification, operating stress is expected to intensify. According to DBRS, builders will continue to “tread lightly” as they attempt to preserve profitability while preparing for a potential rebound in 2026 or 2027.

“Revenue and margins will continue to be pressured for much of 2025, with the potential for increased activity in 2026 and 2027 as pent-up demand is released and improvements to the current supply constraints are hopefully addressed,” the report noted.

Tariffs add more pressure to build costs

A major emerging threat, according to DBRS, is the impact of US tariffs on Canadian construction costs and supply chains. Canada relies heavily on imports from the US for building materials, including $3.5 billion in glass and glass products, $3.1 billion in major appliances, $2.2 billion in hardware, and $1 billion in ceramic tiles and related products.

Planned increases in US lumber tariffs could further disrupt pricing, as Canadian producers may need to redirect surplus lumber to alternative markets or reduce output.

“Ultimately, increases in the costs of these products will make homes more expensive, further exacerbating current buyer affordability challenges,” DBRS warned. “Inflationary pressures might be offset by government actions to reduce the fees and taxes that contribute to home prices. However, these changes will take time, and this unpredictability makes planning future builds increasingly difficult for builders.”

Developers brace for margin pressure

Even before tariff disruptions, Canadian homebuilders were under stress. In 2024, insolvency filings among real estate developers nearly doubled, rising from 36 to 68. DBRS expects revenue and margin pressure to persist, especially for smaller regional builders with limited diversification or financial resilience.

Larger developers with strong local market positions and procurement advantages are better positioned to weather the turbulence. However, all builders are expected to remain cautious with project planning and investment.

“Revenue and margins will continue to be pressured for much of 2025,” DBRS noted, “with the potential for increased activity in 2026 and 2027 as pent-up demand is released and improvements to the current supply constraints are hopefully addressed.”