Canada’s real estate sector faces multifaceted challenges in 2025, including high development costs, cautious lending, and political risks.

Canada’s residential and construction real estate sectors have witnessed a spike in financial difficulties, driven by various challenges extending into 2025. Real estate-related insolvencies and receiverships hit record levels in 2024 due to factors like skyrocketing construction costs, fluctuating interest rates, and a restrictive financing environment. Although the Bank of Canada reduced its policy rate to three percent in late 2024 from five percent earlier that year, the previous high-interest rate cycle exacerbated market volatility, straining finances for developers and buyers alike. Additionally, supply chain disruptions, labour shortages, and escalating material expenses have made development considerably costlier, with municipal permit delays compounding these issues by inflating pre-construction financing costs. Public policy remains inadequate in alleviating soft cost burdens like municipal fees.

In the multifamily residential sector, elevated expenses discourage developers from initiating new projects at a time when Canada requires urgent housing supply. Investor hesitation toward pre-construction condominium purchases serves to reinforce this downturn. Compounding the issue, lending institutions and private credit providers have grown cautious, tightening loans for small or inexperienced developers. This restrained financing, paired with weaker pre-sales, disproportionately impacts smaller firms, while lenders appear more aggressive in enforcing distressed real estate-backed loans – a notable departure from their reluctance during the pandemic.

Nearly a quarter of 2024’s total insolvencies stemmed from residential development projects, a significant portion of the 68 insolvencies tracked in real estate that year – triple the next-most-impacted industry. The office real estate sector adds further unpredictability, although it differs from residential markets in its pace of recovery and demand fluctuations. Political instability further clouds the housing market. Rising trade tensions, including new 25 percent tariffs on steel and aluminium introduced by the US President, raise the spectre of higher material costs and strained profit margins for developers navigating these choppy waters. The potential ripple effects of trade disputes exacerbate financial and policy uncertainty.

In summary, Canadian real estate stakeholders in 2025 must contend with a complex confluence of rising costs, constrained financial support, and shifting market dynamics amid political and economic turbulence. Developers will likely need innovative strategies to manage risks as housing shortages persist, lending tightens, and construction costs fluctuate unpredictably.