Why Canada’s Housing System Is Stalling And What Needs to Change

Canada’s housing challenge is often framed as a simple question of affordability or construction volume. But housing does not operate in isolation. It functions as a continuous system, where each stage depends on the health of the last. Buyer demand enables sales. Sales unlock financing. Financing enables construction. And construction ultimately determines long-term affordability.

Right now, that system is breaking down and the warning signs are flashing across the country.

New-home sales, which serve as the primary engine of housing supply, have fallen to historic lows in nearly every major Canadian market. In the Greater Toronto Area, just over 5,300 new homes sold in 2025, the weakest performance in 45 years. Condominium sales were nearly 90 per cent below the 10-year average, while single-family home transactions fell by more than 60 per cent. Metro Vancouver recorded a 37 per cent annual decline, leaving sales 60 per cent below long-term norms. Calgary, Edmonton, and Montreal have seen similar drops.

These numbers reveal far more than shifting consumer confidence. Pre-sales are essential for unlocking construction financing. When sales fall below critical thresholds, projects slow, shrink, or collapse entirely. Developers cannot secure funding, construction pipelines stall, and future supply evaporates before it ever reaches the ground.

Although national housing starts posted modest growth last year, largely due to purpose-built rental development, this masks a deeper deterioration in ownership-focused construction. Starts in the ownership segment reflect sales decisions made years earlier, and those starts are now declining sharply in Canada’s largest urban centres. This points to structural weakness, uneven housing types being delivered, and a dangerously thin pipeline of new homes.

This trend directly contradicts what Canada needs.

Canada Mortgage and Housing Corporation modelling shows that restoring affordability and balance requires annual housing starts to surge to between 430,000 and 480,000 units for at least a decade. Instead, today’s collapsing sales suggest that future construction will trend sharply downward. Without intervention, Canada is on track to deepen its housing shortage, not resolve it.

This is the context in which policymakers must reassess the mortgage stress test.

Introduced in 2018, the minimum qualifying rate was designed to protect borrowers and the financial system during a period of rapid price escalation and record-low interest rates. By forcing buyers to qualify at higher interest levels, the policy intentionally cooled demand and limited excessive borrowing. At the time, this approach made sense.

But the market environment has fundamentally changed.

Housing prices have stabilized or declined across most major cities, and interest rates are expected to moderate rather than rise further. Yet the stress test continues to constrain buyer access at levels calibrated for a vastly different market cycle.

Evidence shows the impact is substantial. The Canadian Home Builders’ Association estimates the stress test has reduced purchasing power by up to 17 per cent, pushing thousands of otherwise creditworthy buyers out of the market. Bank of Canada research found that nearly 30 per cent of borrowers approved before the rule change would no longer qualify today. Most recently, the Senate’s banking committee called for a formal review of the policy’s relevance.

This demand suppression is now undermining housing supply.

In major urban centres, the primary barrier to construction is no longer speculative excess or overheated demand. Instead, it is the shortage of qualified buyers needed to sustain pre-sales and support viable development. Without those buyers, projects cannot proceed, regardless of zoning reform, funding commitments, or political ambition.

Revisiting the stress test does not imply abandoning prudent lending standards or weakening financial stability. Canada’s banking system remains resilient, and borrower protections remain essential. But recalibrating the policy to reflect the risk realities of 2026 rather than 2018 would help restore balance between safeguarding financial health and enabling housing supply.

The stress test was built to slow markets down. Today, Canada needs policy tools that help restart them, carefully, responsibly, and strategically.

If policymakers are serious about tackling the housing crisis, aligning mortgage qualification rules with today’s economic realities is no longer optional. It is necessary to prevent today’s demand freeze from becoming tomorrow’s supply collapse.