A city revenue shortfall looms. Toronto is in the midst of a financial reckoning as its once-booming real estate sector slows. While headlines often focus on home prices or interest rates, a less visible but increasingly critical issue is emerging: a city revenue shortfall. As home sales stall and development activity shrinks, the City is quietly losing millions in key revenue streams – compromising future infrastructure, services, and even jobs.

The Real Estate Market’s Role in City Finances

Real estate activity doesn’t just shape neighbourhoods – it funds much of what keeps the city running. From land transfer taxes to development charges and permit fees, a strong property market has long underpinned Toronto’s municipal revenue model. But as 2025 unfolds, cracks are forming.

New housing construction has slowed dramatically. Toronto’s housing starts saw a 22% year-over-year decrease in May 2025, driven by fewer multi-unit starts, with a broader GTA slowdown also evident. Developers, faced with declining presales, higher borrowing costs, and less investor confidence, are delaying or cancelling projects. The slowdown in construction is directly reducing the number of development charge payments that flow into city coffers.

At the same time, resale activity has cooled. New home sales in the GTA were down 72% in April 2025 compared to April 2024, with single-family homes down 66% and condominium apartments down 80%. This sharp drop in transactions means that fewer homes are being bought and sold, triggering a noticeable fall in land transfer tax collections—another major municipal funding source.

The Scale of the Toronto Revenue Shortfall

The impact of the slowdown is material. In previous years, Toronto collected over $1 billion annually in land transfer taxes. That number has now dropped below $800 million and could continue to decline if sales volumes don’t rebound. Development charge revenue has also fallen short of projections, with the city now expecting to collect approximately $577 million instead of the nearly $800 million it once anticipated.

Faced with these shortfalls, the City is being forced to rely more heavily on its reserve funds. For the 2025–26 fiscal cycle, over $1.3 billion in reserves may be used just to balance the budget. This approach, while necessary in the short term, could reduce the city’s financial resilience in the future.

In response, city planners and budget officials are reportedly considering a temporary freeze on development charges to incentivize new construction and stimulate economic activity. However, this could also delay needed infrastructure funding in the long run, creating a difficult balancing act between short-term recovery and long-term investment.

Broader Impacts of the City Revenue Shortfall on Toronto’s Economy

The revenue problem isn’t contained to City Hall. It’s having a ripple effect throughout the broader Toronto economy. A prolonged slowdown in development means fewer construction jobs, fewer supplier contracts, and reduced demand for skilled labour. Estimates suggest that if new home sales remain at current lows, the GTA could lose as many as 41,000 jobs, including 18,500 direct construction roles.

This coincides with a rising unemployment rate, which now sits at 8.7% in the Toronto region as of June 2025, up from 7.8% in May 2024. As employment softens, consumer spending may follow – adding another layer of economic drag.

Municipalities like Toronto, which rely heavily on cyclical real estate revenue, are particularly vulnerable in this environment. Not only are jobs and tax income at risk, but delays in housing completions may exacerbate the city’s ongoing affordability crisis, as supply fails to keep up with long-term demand.

What This Means for Residents

Toronto residents may not immediately see the full effect of the city’s revenue gap – but they will feel it over time. Fewer funds mean fewer new capital projects and potential service slowdowns. Infrastructure upgrades, transit expansions, road maintenance, and community amenities may all face longer timelines or reduced scopes if the city can’t replace lost income.

Some of the likely implications include:

• Delays to large infrastructure projects, especially those tied to development charges
• Reductions in non-essential services or program expansions
• Potential increases in user fees or municipal taxes to stabilize finances

While no city wants to raise taxes during an affordability crunch, Toronto may face difficult decisions if the slowdown persists into 2026 or beyond.

How the City Might Respond

City officials are exploring a range of responses to address the city revenue shortfall. Among them is the proposal to freeze development charges temporarily, which could encourage builders to move forward with stalled projects. This measure was indeed adopted by City Council in April 2025. Another option is lobbying for greater provincial and federal support, particularly for infrastructure tied to housing and transportation.

Additionally, the City is reassessing its budget strategy. With over $1.3 billion in reserve funds on the table, the challenge will be using these resources effectively without compromising long-term stability. There may also be increased interest in diversifying the city’s revenue base – shifting away from an over-reliance on land transfer taxes and toward more stable or predictable funding models.

Options being considered include:

• Targeted financial relief or fee adjustments for builders and developers;
• Reprioritizing capital spending to focus on urgent needs;
• Exploring new revenue tools, such as congestion pricing or value capture financing.

These discussions are still evolving, but they reflect an urgent need for innovation in how the city manages both its real estate strategy and its financial framework.

A Critical Turning Point

Toronto’s city revenue shortfall is more than just a budgeting issue – it’s a signal that the city’s growth model needs to adapt. The previous decade relied heavily on real estate to fuel municipal income, but current conditions show how fragile that model can be. A city dependent on constant construction and rapid property turnover is left exposed when the cycle slows.

This moment offers an opportunity to rethink how Toronto builds, funds, and governs growth. There is still robust long-term demand for housing in the GTA, but affordability, policy reform, and smart fiscal planning must now take centre stage.

Residents, developers, and policymakers all have a role to play in shaping this next phase. Transparent budgeting, public engagement, and strategic incentives can help guide the city through its current shortfall – while laying the groundwork for a more resilient financial future.

Conclusion

Toronto’s real estate cooldown is now revealing its fiscal consequences. As development activity slows and home sales decline, the resulting city revenue shortfall is already reshaping the City’s ability to fund services and infrastructure. While short-term solutions like fee freezes and reserve fund use may bridge the gap, long-term strategies will require innovation, diversification, and decisive public leadership.

The good news is that with proactive planning and thoughtful reforms, Toronto can still turn this moment of financial strain into one of structural renewal. The question is whether the city can act quickly and strategically enough to seize that opportunity.