Canada’s Drop in Housing Starts: A Tale of Mispriced Expectations
Canada’s housing starts conundrum is not one of waning demand but of misaligned pricing expectations. The pace of new housing starts in major Canadian cities fell in 2024. However, 2022 and 2023 were peak years for property investment hype. Housing starts today are not far off the levels seen in 2020 and 2021.
| Year | Metro Toronto | Metro Vancouver |
|---|---|---|
| 2020 | 38,587 | 22,371 |
| 2021 | 41,898 | 26,013 |
| 2022 | 45,109 | 25,983 |
| 2023 | 47,428 | 33,244 |
| 2024 | 37,718 | 28,112 |
Starts are falling because pre-sales are very slow. Pre-sales are purchases of unbuilt and completed brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before starting construction. Toronto condo apartment pre-sales are doing very poorly, but it’s easy to see why.
Prices of new homes have been falling, and some homebuyers who locked in pre-sales contracts after 2021 might find they will have paid much more than the more recent buyers in their development. Based on economic fundamentals, they will likely continue to drop.
As a buyer of new construction expected to be completed in 2028, why would I lock in the price today when I might get a better price if I wait six months?
Despite gloomy headlines about a dramatic drop in housing starts—and proposals to backfill the shortfall by welcoming foreign capital for developer pre‐sales—the facts paint a very different picture.
Robust Latent Demand Amidst Demographic Boom
Recent data reveal that Canada’s population has surged in recent years, with estimates indicating an increase of roughly 937,000 people in 2024 alone—lifting the total above 41.5 million.
| Year | Metro Toronto | Metro Vancouver |
|---|---|---|
| 2019 | 112,805 | 51,937 |
| 2020 | 65,646 | 35,472 |
| 2021 | -18,988 | 20,464 |
| 2022 | 110,308 | 80,773 |
| 2023 | 221,588 | 119,650 |
| 2024 | 301,532 | 137,088 |
This demographic boom, primarily driven by immigration, has created a solid base of eager homebuyers nationwide. Despite the dramatic rhetoric about falling housing starts, the reality is that there remains ample latent demand. Prospective buyers are not deterred by a lack of interest; instead, they are waiting for a more attractive price point.
The rapid population growth, fueled by robust immigration levels, ensures that the housing market is underpinned by a constant influx of new consumers. The appetite for home ownership persists in many more affordable regions, particularly in urban centres like Calgary, Montreal, and Edmonton.
In pricier regions, buyers today are more cautious—preferring to wait for the market to reflect current economic realities rather than locking in prices that might soon be overvalued.
According to the CMHC 2024 Mortgage Consumer Survey:
Nearly half (46%) of all buyers in 2024 paid the maximum price they could afford for their home.
Close to a third (35%) of home buyers paid more than planned.
Nearly two out of every three home buyers (62%) were concerned they had overpaid.
We should not be surprised that buyers in 2025 who have heard about their friends’ experiences are much more cautious.
Of course, the trade wars add to the market challenges. Still, the underlying foundational issues with the pre-sale market and housing starts were in place well before anyone contemplated the possibility of a trade war with the U.S. and China.
Developers’ Misaligned Expectations
A closer look at the housing supply side reveals a disconnect between developers' assumptions and current market conditions. Developers purchased and assembled land for new projects years ago, believing the market would continue its upward trajectory.
Their business plans depended on rising prices to make ambitious projects profitable for themselves and their investors. However, the current environment is characterized by a downward pricing trend that has rendered many of these earlier projections obsolete. Developers took risks because they thought a price drop was unlikely, and now they’re lobbying the government for help. Should the Canadian taxpayer be on the hook to bail out the risky developers when plenty of conservative developers have profitable projects?
For developers, the profitability of their projects now hinges on a rebound to peak prices—a scenario that appears increasingly unlikely. The challenge is not a lack of consumer demand but rather an over-optimistic pricing model established during boom times. With property values on a downward path, the risk profile of these projects has fundamentally changed, and many cannot clear their inventory at the high margins originally envisioned.
As pre-sale prices continue to drop, buyers will re-enter the market, and the more conservative developers will start construction and complete projects. The risky developers might have to sell their projects at a loss for another developer to complete.
“The One” is a well-known 85-storey luxury Toronto project that ran into financial difficulty and was acquired by Tridel to complete.
Financial Post: Tridel tapped to lead completion of Toronto’s troubled luxury condo tower The One
Price Hesitation: Buyers Waiting for the Right Moment
Individual homebuyers are in a quandary. They face the prospect of committing to a price today only to find that the property's market value has eroded two or three years down the line. This strategic hesitation is rational: locking in a purchase at today’s prices, which are trending downward, could lead to a significant loss in equity when the market eventually corrects itself.
The reluctance to commit is not symptomatic of a falling market in terms of demand but rather of a rational expectation that prices will continue to decline in the near future. In effect, the buyers are holding out for a moment when market prices align more closely with long-term economic fundamentals.
Buyers are waiting to see an end to price drops.
What is the rational value for a condo apartment, given local incomes? Prices have more than doubled since 2015, but incomes have barely budged. The housing affordability crisis pre-dates 2015, so it’s not like prices at their peak were tied to economic fundamentals.
Toronto has already experienced a bubble burst, with condo apartment prices dropping from $825 to $650 thousand—a 20% drop from the peak.
Vancouver prices have plateaued, but prices might have to drop to coax buyers back into the market.
Government Intervention: To Prop or Not to Prop?
Amid calls for government intervention, some policymakers have argued for reversing measures such as the foreign buyer ban—initially imposed in January 2023 and extended until January 2027—to stimulate housing starts. New voices from political quarters, including hints from Prime Minister Mark Carney, suggest that opening the door selectively to foreign investment in new construction and pre-sales could help developers clear their backlogs.
There are three problems with the proposal.
It assumes foreign buyers are not savvy investors. Investors are more fickle than people buying homes to live in. If the numbers don’t make sense, why would you expect foreigners to overpay for Canadian property? Unless the investor is buying property to legitimize dark money.
Such proposals don’t solve the core problem of inflated developer price expectations; loosening restrictions would merely serve as a temporary band-aid and encourage developers to take on more risk in the confidence that they have access to free government bailouts.
Prices overshot during the pandemic, creating crisis levels of unaffordability, and now we are seeing a correction. If the government intervenes to prop up prices at unaffordable levels by bringing in foreign buyers, they will perpetuate the housing affordability crisis rather than allowing the market to find the appropriate price. If foreign buyers are used to prop up artificially high prices, Canadian taxpayers will need to subsidize more affordable housing options to address the affordability crisis.
Critics contend that Canada’s economic foundations are capitalist and free-market oriented, with social safety nets for individual taxpayers. Developers' risks—risks taken years ago when the market was different—should not be transferred to Canadian taxpayers. The government should ensure that market fundamentals are allowed to adjust naturally, not to financially support speculative behaviour.
A Natural Market Correction: Letting Unprofitable Projects Fail
The most sustainable solution appears to be allowing unprofitable projects to fold. Once these projects collapse, the land can be reassembled by new developers who will price it in accordance with current market demand. In this way, the mispricing in the housing market can be corrected without resorting to heavy-handed regulatory interventions.
Instead of propping up developers through market distortions or reversing bans on foreign ownership, policy should focus on facilitating a natural reallocation of resources. When projects fail to meet the revised market expectations, the land can eventually be put back on the market at price levels that more accurately reflect the current economic climate.
This might spell bad news for some developers who took unreasonable risks, but it rewards the developers who maintain a long-term and sustainable approach to business.
Looking Forward: Policy and Market Fundamentals
As Canada continues to experience record demographic growth, the interplay between housing demand, developer expectations, and government policy will be critical in shaping the market. The key takeaway is that demand is not the issue—the problem lies in outdated property pricing that no longer reflects economic reality.
For policymakers, the challenge is to foster an environment that encourages market correction without resorting to ad hoc measures that merely delay the inevitable adjustment. Developers must be allowed to bear the consequences of their risk-taking, rather than shifting those burdens onto taxpayers. By permitting unprofitable projects to collapse, the market can eventually reassemble and price land more in line with current demand and long-term economic fundamentals.
A Call for Realism in Housing Policy
Canada’s housing market is at a crossroads where robust demand coexists with overly optimistic developer expectations. The solution does not lie in artificially inflating prices through regulatory intervention or subsidising speculative projects. Instead, a more rational approach is to allow market forces to reallocate resources naturally. As the demographic tide continues to rise, so too will the true, market-driven housing starts—provided that prices are allowed to adjust to their real values.
The government’s role should be one of facilitation rather than intervention—ensuring that the risks assumed by developers are not passed on to taxpayers, and that the market is left to correct itself. Only then can Canada’s housing sector move toward a more sustainable equilibrium that truly reflects the needs of its burgeoning population.
