Amid a national housing shortage, total Canadian housing starts for January and February 2025 were down 5% from the year-ago period, according to the Canada Mortgage and Housing Corporation. In fact, Canadian developers have struggled to build more than 250,000 houses per year, despite the influx of more than 4 million new residents during the past five years. The CMHC estimated that the country would need to build an additional 6 million homes by 2030 to restore housing affordability, keeping housing among the top political issues ahead of the 2025 federal election.
As the election approaches, the underlying market fundamentals are positive for developers, including a housing undersupply, government targets for increased supply, and the promises of planning reform to unlock growth. However, for the remainder of 2025, we expect recovery in the sector will be slow and development will remain relatively subdued, challenged by heightened geopolitical uncertainty, buyer affordability concerns, high and evolving building costs, and regulatory red tape.
We expect developers will continue to offer higher incentives through most of 2025 to attract buyers looking for affordable options, keeping margins under pressure. As a result, credit profiles of regional developers are expected to remain under increased operating stress. Notwithstanding election promises, we expect developers will continue to tread lightly, balancing squeezed profitability and difficulty in planning for projects while preparing their businesses for an eventual market rebound.
Unpredictable Trade Policies Adding Fuel to the Fire
The implications of US tariffs on construction costs and supply chains, as well as Canada’s retaliatory actions, are ever evolving and difficult to predict. The Canadian Home Builders’ Association estimates that Canada imports roughly $3.5 billion in glass and glass products, $3.1 billion in major appliances, $2.2 billion in hardware, and about $1 billion in ceramic tile and products from the United States. In addition, US plans to increase lumber tariffs will affect the competitiveness of Canadian producers as they will be forced to find alternative markets for excess lumber or slow production.
Ultimately, increases in the costs of these products will make homes more expensive, further exacerbating current buyer affordability challenges. 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.
Will the Upcoming Federal Election Bring Change?
Canadians are heading to the polls on April 28. On the campaign trail, both Liberal and Conservative candidates are promising to improve housing supply through various initiatives. Notwithstanding the objectives to boost supply, the federal government’s plan to remove the goods and services tax to assist first-time homebuyers may drive improved demand but exacerbate the same housing problem they are trying to solve.
In 2024, the Liberal government announced a reduction in permanent resident targets to 395,000 in 2025, 380,000 in 2026, and 365,000 in 2027 from 485,000 in 2024. Canada’s previous immigration plan included targets of 500,000 for both 2025 and 2026. Additionally, the government has set an ambitious target to reduce the number of nonpermanent residents to 5.0% of the total population by the end of 2026 from 7.4% in 2024.
Although these reduced immigration targets should help to mildly ease housing demand, the industry is heavily reliant on skilled immigrants. Statistics Canada estimates that 23% of all general contractors and residential builders in Canada’s residential construction sector are immigrants. Therefore, immigration has a direct impact on a developer’s ability to both plan and price upcoming projects.
For more on Canada’s revised immigration policies and the possible ramifications of the election, see Hitting the Reset Button: The Impact of Revised Immigration Policies in Australia and Canada and Weighing the Choices: The Implications of Canada’s Election in a Highly Uncertain Environment.
Homebuilder 2025 Revenue and Margins Will Continue to be Stressed
Even before the US tariffs, the Canadian housing industry was under stress. Investor insolvency filings among real estate investors and developers almost doubled to 68 filings in 2024 from 36 in 2023.
Revenue and margin pressure is likely to continue throughout 2025, and as a result, credit profiles of regional developers are expected to remain under increased operating stress. The industry is largely made up of smaller regional developers, which lack balance sheet strength, segment diversification, and broad geographic footprints, and we expect them to remain under significant stress. Larger players that benefit from strong local market positions and that have the proven ability to successfully navigate changing business cycles will continue to benefit from their scale by securing subtrade pricing and purchasing efficiencies.
We expect all developers will continue to carefully balance construction activity with sales. 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 author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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