Gradual Recovery Expected for Homebuilding Sector in 2025: Report

A report by Morningstar DBRS for the homebuilding sector in 2024 has revealed that sector recovery in 2025 is expected to be slow as developers navigate buyers’ budgets and production challenges.

Property developers throughout North America and Europe faced a challenging operating environment over the last two years, that resulted in volume declines and margin compression. This was due to build cost inflation as well as the higher incentives used to attract potential buyers.

Governments across North America and Europe have set goals to tackle housing undersupply. With elections in Canada and Germany in 2025 and new political administrations in the U.K. and U.S., policy changes will be crucial for developers managing costs and timelines. Supply-side reforms aimed at cutting red tape will take time to implement, though measures such as Canada’s Housing Accelerator Fund revisions, U.K. housing targets, and U.S. federal land proposals are worth monitoring.

In 2025, recovery is expected to be slow in the sector, with development remaining relatively subdued as a result of affordability concerns, mortgage rate lock-in effects, land costs, permitting issues, and changing political landscapes.

The overall outlook for the homebuilding sector in 2025, however, has improved, as a result of relatively strong levels of employment, particularly in the U.S. This, along with stabilized mortgage interest rates, should work well for homebuyer budgets in 2025. High property prices, elevated interest rates, and difficulty saving for a downpayment, however, remain challenges.

Higher interest rates, in particular, have impacted buyers looking to enter the housing market. Long-term fundamentals, such as housing undersupply, remain positive for the sector. As the operating environment continues to moderate, builders are expected to carefully balance construction activity with sales in 2025. Modest revenue improvements are also predicted, with margin pressures expected to ease gradually when approaching 2026.

In terms of lot costs, they are expected to rise above 2024 levels. Although build cost inflation is anticipated to moderate this year, geopolitical tensions may still impact both material and labour costs.

To address affordability challenges, builders have introduced incentives such as rate buydowns, which are expected to persist through the first half of 2025. Developers are also emphasizing smaller, more affordable homes to meet buyer needs.

“As the operating environment continues to moderate, we expect builders will carefully balance construction activity with sales in 2025,” said Margaret Rabba, vice president, diversified industries. “We expect a modest improvement in revenues and, notwithstanding the impact of geopolitical uncertainties, pressure on margins to remain through H1 2025 but to gradually ease as we approach 2026.”