A new tax regime in Canada's two busiest housing markets caused demand for homes in British Columbia and Ontario to dry up in July, driving a 30 per cent decline in national sales activity from a year ago.
Canadian home sales were down 6.8 per cent from June, continuing a months-long cooling trend in Canada's once-bustling real estate sector, the Canadian Real Estate Association reported Monday.
About 85 per cent of July's decline can be traced to fewer sales in B.C. and Ontario -- which generally account for more than half of national sales -- as the new harmonized sales tax prompted many buyers to push sales into the first half of the year, CREA said.
"The soft sales figures we're seeing right now can be attributed in part to accelerated home purchases earlier in the year," said CREA president Georges Pahud.
Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the gap is expected to shrink as the year progresses because sales ramped up heavily during the latter part of 2009.
Sales activity peaked in December 2009 and hovered near record levels during the first quarter of this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest rate hikes and the HST.
But sales have dropped in six of the last seven months and were down 25 per cent in the past three months alone, said Douglas Porter, deputy chief economist at BMO Capital Markets.
"We (and many others) were consistently warning of a significant second-half slowdown in housing activity but, if anything, the cooling looks even a bit chillier than expected," he wrote in a report.
British Columbia had the biggest drop-off at 14.1 per cent, followed by Ontario with an eight per cent decline. Meanwhile, sales in the Prairies and Quebec were on par with June levels.
Grant Bishop, an economist with TD Economics, noted that the HST, which kicked in July 1, applies to realtor commissions but does not actually change applicable taxes on resale homes.
However, "a certain of amount of new home buying was moved forward by mistaken homebuyer perceptions that purchases ahead of HST implementation would save the tax, ignoring that the pre-HST rush may have actually pushed up prices, with consequent give-back in July," he said in a report.
The average price of homes sold through CREA's Multiple Listing Service in July was $330,351, up one per cent from a year ago and the smallest increase since prices began to rise in May 2009.
July's average price fell from $342,662 in June, as fewer buyers competed for homes.
Prices have decelerated on a year-over-year basis and contracted 1.5 per cent last month from June, making July the third consecutive month of declines, Bishop said.
He added that he expects a contraction in prices over the coming year.
"With housing 10 to 15 per cent overpriced, we expect a downward correction of nearly 10 per cent in the monthly average prices, followed by several years of stagnation of price growth at the rate of inflation, in order to bring Canadian house prices back to balance," he wrote.
Porter said he believes it is just a matter of time before the year-over-year price comparisons sag to around zero.
"Indeed, there are likely to be some modest declines in headline prices compared with year-ago levels before 2010 runs its course, particularly in the HST-affected B.C. and Ontario markets," he said.
Meanwhile, July saw the steepest decline of new listings in over a decade -- down 7.2 per cent from June.
Since a recent peak in April, new listings have fallen 17.5 per cent in a trend CREA says will help maintain the balance between supply and demand, as well as "temper home price volatility."
The number of months of inventory, which represents the number of months it would take to sell all listed homes at the current rate of sales activity, stood at seven months in July, up from 4.4 months a year ago.
Meanwhile, sales of office towers and shopping centres are poised to drive growth in Canada's real-estate market as a boom in the commercial sector is set to pick up just as demand for homes dries up, according to a report on the commercial sector released Monday.
Activity in Canada's commercial real-estate market increased by 60.2 per cent to 2,243 sales in the first part of the year, up from 1,565 transactions halfway through 2009, according to a mid-year report by commercial real-estate firm CB Richard Ellis Ltd.
"There is indication in the numbers that the market has rebounded from the recession," John O'Bryan, the real estate firm's vice-chairman, said of the report.
"As the second half of the year typically shows stronger activity than the first, the commercial real-estate market is poised to finish on strong and stable footing."
Transactions totalled $7.8 billion at the midpoint of 2010, nearly double the $4.9 billion in sales recorded halfway through 2009.
Led by Toronto and Vancouver -- markets that face declining residential sales -- commercial real-estate transactions were up in all major Canadian cities, a trend that does not happen very often, O'Bryan said.
Demand in the commercial market is driven by a combination of lower bond rates and increased availability of debt, whereas residential demand is driven by attractive interest rates and home prices.
