Canada's housing narrative has reversed dramatically in 2025. What policymakers described as a critical housing shortage has transformed into a measurable surplus, with concrete data revealing the depth of this market shift.

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Housing Starts Plunge Despite Record Permits

Housing starts dropped to 245,800 units in August, down 16% from July's levels. This decline occurred while residential building permits reached a record high of nearly 350,000 units in the same month. The gap between permits and actual construction has never been wider. This data directly contradicts claims that regulatory red tape is the primary bottleneck in housing supply. Developers have permits but are choosing not to build, indicating a demand problem rather than a supply constraint. Construction costs continue rising despite falling demand, with residential building costs increasing 1.0% in the second quarter of 2025. This cost inflation occurs while builders sit on unprecedented inventory levels.

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Unsold Inventory Reaches 25-Year High

The most significant indicator of oversupply is unabsorbed inventory. Nearly 12,000 completed but unsold units were reported in August, representing 50% above the long-term average. This marks the highest level of finished, unsold homes in at least 25 years. Multi-family housing bears the brunt of this surplus. Condominium and apartment developments that developers expected to sell during pre-construction now sit completed without buyers. Single-family homes maintain relatively healthier absorption rates, but even this traditionally stable segment shows softening demand. The pre-construction sales model that sustained Canadian development for decades has collapsed. Investors and end-users who typically purchased units before completion have largely exited the market, leaving developers holding finished inventory.

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Regional Market Data Shows Broad Weakness

Toronto and Vancouver experienced declines in housing starts, while Calgary, Edmonton, Montreal and Ottawa posted gains. However, even markets with increased construction activity report rising unabsorbed inventory. Canada's national average home price was $672,784 in July 2025, with most provinces showing modest annual price growth. This price level remains deeply unaffordable for typical Canadian households, explaining why supply cannot find buyers despite record inventory levels. RBC forecasts price declines in the latter half of 2025 and into 2026, with Ontario and British Columbia experiencing the steepest drops due to high inventory levels. The bank's national composite Home Price Index is expected to rise only 0.7% in 2025, reflecting gains made earlier in the year before the correction began.

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Construction Input Costs Create Price Floor

Despite collapsing demand, residential construction costs increased 1.0% in the second quarter, following a 0.9% increase in the previous quarter. Industrial distribution construction costs jumped to $160-440 per square foot in 2025 from $155-430 per square foot in 2024. Material price changes now show year-over-year increases of 0-3%, with costs for concrete, steel, and mechanical components stabilizing but not declining. This cost structure prevents builders from reducing prices to market-clearing levels, creating a standoff between elevated construction costs and weak demand. Government infrastructure spending and building stimulus programs maintain demand for construction inputs, preventing the cost deflation that typically follows demand shocks. This policy approach props up input costs while builders struggle to move inventory.

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Market Mechanics of the Surplus

New home sales in major markets have reached record lows while existing home listings surge to record highs. This dual pressure floods the market with supply options while demand evaporates. The speculative investment demand that drove pre-construction sales has disappeared as interest rates normalized and lending standards tightened. Investors who leveraged heavily into real estate during the low-rate period cannot or will not complete purchases, leaving developers with unsold inventory. Meanwhile, end-user demand remains constrained by affordability. At current price levels, typical Canadian households cannot qualify for mortgages or afford monthly payments, creating a fundamental mismatch between housing costs and household incomes.

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Absorption Capacity Questions

Economist Kari Norman raises the critical question: Can Canada absorb the existing supply pipeline at current prices? The data suggests the answer is no. With 350,000 units permitted but only 245,800 units started, and 12,000 completed units sitting unsold, the market shows clear signs of oversupply. The pipeline contains thousands of additional units scheduled for completion over the coming months. Historical patterns show most new homes were purchased during pre-construction, minimizing builder exposure to market risk. This system has broken down completely, leaving developers holding inventory they cannot move without significant price reductions.

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Crash vs. Correction Analysis

Current data points toward a prolonged correction rather than an immediate crash. The gradual accumulation of inventory over months, combined with builders' measured response to weak demand, suggests an adjustment process extending over years rather than quarters. However, crash risk increases if forced selling emerges from overleveraged developers or if inventory continues accumulating at current rates. With 12,000 unsold units representing 50% above average levels, the market approaches territory where disorderly price declines become possible. The key metric to monitor is monthly absorption rates. If existing inventory cannot clear at current price levels within 12-18 months, pressure for significant price reductions will intensify, potentially triggering more rapid market adjustments.

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Conclusion

Canada's housing market has shifted from shortage to measurable surplus within months. With housing starts 16% below July levels, permits at record highs, and 12,000 unsold units representing a 25-year inventory peak, the data contradicts ongoing shortage narratives. Construction costs rising 1.0% quarterly while demand collapses creates an unsustainable dynamic. Government stimulus maintaining input costs prevents normal market clearing, prolonging the adjustment period.

For buyers, this represents the first genuine opportunity in years to purchase without competing against speculative demand. However, timing remains challenging as price discovery continues across all market segments.