Canada's resale housing boom has run out of steam.
After a year of solid gains, monthly sales in major cities took their first step back in May as the threat of higher mortgage rates, tighter qualification rules and a flood of new listings took the pressure off buyers to rush into the market.
In a number of markets, real estate agents said bids have virtually dried up as waves of new homes hit the market. The first quarter saw a record 233,402 properties listed as homeowners looked to cash in at what they perceived to be the top of the market.
The abrupt shift from a sellers' market, where bidding wars were the norm, to a buyers' market, where bidders can afford to demand lower prices, has led to price reductions in some cities.
"We had to bring the price way down," said Amy Polson, a Toronto agent with Royal LePage Real Estate Services Ltd. who recently sold a three bedroom detached home in Toronto's east end for $561,000 after the price was dropped 12 per cent.
She said there has been a huge increase in listings in the past few weeks and sellers "have to be more competitive with their pricing to get noticed."
"It's just like someone turned off the tap," said real estate agent Paige Guernsey, who works at Coldwell Banker Horizon Realty in Kelowna, B.C. "You'd think all the buyers sent each other e-mails agreeing not to buy anything for a little while."
May is typically the busiest selling month of the year as families look to move before a new school year begins. But many buyers made purchases earlier this year, compelled by government rule changes that made it harder to qualify for mortgages in April and the threat of higher mortgage rates later in the year.
The flurry of activity drove the national average price of a home to $344,968 by the end of April. The Canadian Real Estate Association expects prices to level off this year before posting a 2 per cent decrease in 2011.
"People worried about a bubble and the government tapped the brakes earlier this year and you're starting to see that working," said Phil Soper, chief executive officer of Royal LePage. "Rising prices have also tempered demand. I'm actually glad to see things cool a bit, because it's gotten to the point where it's difficult for many buyers. "
Mr. Soper said the market likely peaked in December, and the number of sales has been easing off since. Prices in Toronto and Vancouver have gone too high, putting homes out of reach for the average buyer, he said.
Jen McCauley, who works in television in Toronto, planned to spend $400,000 on a home earlier this year but backed out recently because of high prices. Ms. McCauley, who owns a condominium, said she'd rather wait to see where things settle before making any bids.
"Things are just so expensive," she said. "With all the uncertainty about the economy and where prices are going, I'd rather just stay where I am and let things get sorted out."
CIBC World Markets economist Benjamin Tal said prices could decline by as much as 10 per cent in the next two years, but that a "violent" correction similar to the one seen in the United States remains unlikely because Canadians will keep paying their mortgages by cutting back on other discretionary expenses.
The recovery has overshot what is justified by the economy, Mr. Tal said, with 17 per cent of Canadian homes trading above their fair value, according to his analysis. Modifying a formula created by the International Monetary Fund, he said prices are higher than they should be in Canada "as justified by housing market fundamentals, such as income, rent or demographic changes."
The slowdown is the beginning of real estate "stagnation" that will last until 2015, he said.
"The correction is starting. It's not going to be a free fall, but we are going to see prices falling for some time."