Canada Mortgage and Housing Corporation (CMHC) released new housing starts data this week, and, on the surface, there was something of a rosy tone. The government agency reported that the seasonally-adjusted annual rate (SAAR) of housing starts edged up 4% in July to 294,085 units, marking the highest level of starts since September 2022.

That would give you the impression that starts, defined as the moment the foundation on a new build has been poured, are on a good trajectory, however, it’s more indicative of development intention from the past. As stated by CMHC’s Deputy Chief Economist Tania Bourassa-Ochoa in a press release from Monday, the “persistently elevated national results are reflective of investment decisions made months or even years ago, highlighting the influence of previous market conditions and builder sentiment on current construction trends.”

Meanwhile, a new report released Wednesday by economists at RBC further points out that while starts are up nationally, construction in the country’s most populated province is sorely down.

“Ontario stands out with a steep decline since mid-2024, particularly in the Greater Toronto Area. British Columbia has also seen a moderation, but to a much lower extent,” writes RBC Assistant Chief Economist Robert Hogue. “This divergence is concerning, because it threatens to perpetuate severe affordability problems that exert social and economic hardship on Canadians in these regions.”

“While homebuilders and municipalities are keen to respond, factors like the high development and building costs in Ontario, and substantial inventory are weighing on the initiation of new projects. This raises concern about whether future housing stock can meet demand,” Hogue goes on to say.

According to CMHC’s data, Ontario saw 62,700 starts in July, compared to 77,900 the same month last year, representing a massive 24% drop. “Ontario’s six-month average has fallen to the lowest level in a decade — trending in the opposite direction of what’s needed to achieve the provincial government’s ambitious goal of building 1.5 million new homes over 10 years,” says Hogue. “It’s a similar, albeit less pronounced, situation in BC.”

Alberta and Atlantic Canada are experiencing all-time highs in residential construction, the report posits, so what’s holding back starts in Ontario?

“High development and construction costs are major barriers. Builders saw a rapid escalation of expenses for land, labour, and materials, compounded by municipal development charges and other fees in the past several years,” writes Hogue. “These costs make it exceedingly difficult to bring new housing projects to market at prices prospective buyers can afford, particularly in the expensive GTA.”

Beyond that, Hogue underscores that the supply overload in Ontario, which makes new inventory less attractive than resale, is due to the lower price-point and high availability of the latter. “Meanwhile, investor interest in pre-construction condos — a key driver of housing starts in the GTA — has nearly collapsed,” he adds. “The Bank of Canada’s earlier interest rate hikes, a cooling rental market and declining condo prices have deterred investors, leading to a sharp drop in pre-construction condo sales. Without investor confidence, many projects are unable to get off the ground, further stalling new construction.”

On top of all of that, Ontario municipalities like Toronto are “issuing more building permits than builders are acting on,” which points to a “major bottleneck” in costs, says the report. Hogue specifically points to development charges, which oftentimes prevent projects from pencilling out.

“The full impact of the current slowdown in housing starts won’t be felt for years in Ontario. It can take two, three or more years to complete a large multi-unit project once the foundation has been poured,” he adds. “Indeed, the GTA market is still absorbing the wave of condo units completed in 2024 started during the pandemic or even earlier. Units currently under construction (more than 93,000 units as of July) are just 11% off from all-time highs in the region, which suggests completions are likely to stay relatively plentiful (albeit diminishing) in the near term.”

Hogue underscores that Ontario’s housing construction pipeline, if not addressed, will taper outby 2026. “Any material drop in completions causing a slowdown in the housing stock’s expansion would make it that much harder to close the province’s housing supply gap,” he adds. “It could increase the shortfall and aggravate the affordability crisis if it coincides with a rebound in population growth once Canada’s immigration policy is readjusted.”

This is a topic that has been discussed at length by industry stakeholders, and some are calling the impending reality a “construction cliff.”

Even more troubling is the fact that industry leaders were calling for the “cliff” to materialize by 2027 or 2028, but economists with RBC are forecasting it to happen even sooner.