TORONTO — Demand for homes in British Columbia and Ontario dried up in July following the introduction of a new tax regime in what had been two of Canada’s busiest housing markets — driving a 30 per cent decline in national sales activity last month.

The Canadian Real Estate Association reported Monday that home sales through its MLS service across the country were down 6.8 per cent from June, continuing a months-long cooling trend in Canada’s once-bustling real estate sector.

About 85 per cent of July’s decline can be traced to fewer sales in British Columbia and Ontario as the harmonized sales tax prompted many would-be buyers to push sales forward into the first half of the year, CREA said in a release Monday. The two provinces generally account for more than half of sales nationally.

“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 second half of last year.

Sales activity peaked in December 2009, as pent-up demand built up during the recession and was released in an environment of ultra-low interest rates.

And even after pent-up demand receded earlier this year, sales remained at near-record levels as buyers rushed into the housing market in advance of changes to mortgage rules, interest rate hikes and the introduction of the harmonized sales tax in B.C. and Ontario.

But sales dropped in six of the last seven months and were down 25 per cent in the past three months alone, pushing the balance closer to a buyer’s market, said Douglas Porter, deputy chief economist at the Bank of Montreal (TSX:BMO).

“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 Monday.

Economic uncertainty has exacerbated the effects of other cooling factors, including the HST, effective July 1 in B.C. and Ontario, which applies tax to a number of services, including realtor commissions, that were previously exempt.

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 (TSX:TD), noted that the HST did not actually change applicable taxes on resale homes, but the perception that it would was strong enough to push sales ahead.

“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.”

The average price of homes sold through the Multiple Listing Service was $330,351, up one per cent from a year ago and the smallest increase since prices began to rise in May 2009.

However, CREA noted that the national average home price was likely understated because the majority of the declining sales occurred in B.C. and Ontario, which include many of Canada’s most expensive markets.

July’s average price also fell from $342,662 in June, as fewer buyers compete for homes.

Prices have decelerated on a year-over-year basis and also contracted 1.5 per cent from June, making July the third consecutive month of declines, Bishop said.

He expects a moderate 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 in a report.

Home prices peaked in May as many first-time homebuyers brought forward their purchases in advance of the announced changes to mortgage regulations, which came into effect at the end of April, said CREA economist Shaun Cathcart.

“Slowing first-time home buying activity in May meant lower- and mid-priced homes made a smaller contribution to the average price calculation, causing the average price to be skewed upward as a result.”

Porter believes it is just a matter of time before the year-on-year price comparisons sag to around zero after steady declines in recent months.

“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, new supply saw the steepest decline in over a decade, with the number of new listings on the MLS 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 current inventories at the current rate of sales activity, stood at seven months in July, up from 4.4 months a year ago.

That means it’s taking sellers longer to move their houses, and indicates the market is now balanced between buyers and sellers, CREA said.

“Activity may remain at lower levels for some time,” the association, which represents Canada’s 100,000 realtors, said in a release.

“But ultimately we expect a more stable market to emerge, with demand coming back into line with economic fundamentals.”

Article found at http://www.ctv.ca/CTVNews/Canada/20100816/housing-market-100816/