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For the second straight month, home resales in Canada declined and price inflation slowed in May.

Christopher Katsarov/The Globe and Mail

Canada’s real estate association has revised its home-price forecast higher, predicting the nation’s average selling price will jump by 19 per cent this year, even as activity continues to cool across most of the country.

For the second straight month, home resales declined and price inflation slowed in May, with potential buyers increasingly priced out of the market or taking a break after repeatedly losing out to higher bidders.

“More and more, there is anecdotal evidence of offer fatigue and frustration among buyers,” Cliff Stevenson, chair of the Canadian Real Estate Association, said in a news release.

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CREA now predicts the national average home price for the year will increase by 19.3 per cent to $677,775, with the shortage of properties continuing to drive competition and push prices higher. That forecast is up from its previous outlook for an increase of 17 per cent over last year. In comparison, the average price rose 13 per cent from 2019 to 2020.

“Home prices haven’t peaked yet in Canada,” said Royal Bank of Canada senior economist Robert Hogue, who recently revised the bank’s home-price forecast higher and said policy makers hadn’t done much to cool the market. “Strong competition between buyers is keeping intense upward pressure on property values at this stage,” he said in a note.

For home resales volume, CREA revised its forecast down and said annual resales would rise by 24 per cent instead of 27 per cent. The previous forecast was issued in March, before activity started to ease.

Low mortgage rates and the desire for bigger properties have fuelled a COVID-19 pandemic real estate boom. Home prices in smaller cities and rural areas are 30 per cent to 56 per cent higher than a year ago.

The pace of price increases and mortgage borrowing has alarmed RBC’s Mr. Hogue, other economists and even some realtors. The Bank of Canada has repeatedly said home-price increases can’t be sustained because interest rates will eventually increase. And the federal government imposed stricter borrowing rules in June.

But the central bank’s warnings and a tougher mortgage stress test have had little to do with the current slowdown.

With COVID-19 cases declining, more of the population getting vaccinated and the economy reopening, CREA’s Mr. Stevenson said the urgency to find a place to ride out the pandemic is expected to fade.

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In May, there were 56,156 home resales on a seasonally adjusted basis. That was a 7-per-cent drop from April. Every province recorded lower resales, with Atlantic Canada experiencing double-digit percentage declines. That followed an 11-per-cent national decrease in resales from March to April. New property listings also declined.

CREA’s home-price index, which adjusts for expensive purchases, decelerated significantly. It was up 1 per cent from April to May, compared with the 2.4-per-cent increase from March to April and a 3-per-cent rise earlier in the year.

“Sales activity is unwinding from the stratospheric levels seen earlier in the pandemic, but is still very strong,” said Toronto-Dominion Bank economist Rishi Sondhi, adding that the falling sales may have also weighed on price increases.

CREA said most of the slowdown is attributable to detached and semi-detached houses, which saw the steepest price increases after the pandemic started. Today, small Southern Ontario cities such as Cambridge, Guelph and Hamilton are no longer affordable, with prices for detached houses around $800,000.

In the Toronto region, the home-price index is more than $1-million. That means more buyers are forced to consider a condo, which are typically cheaper than houses, or to rent.

“When buyers call us and say, ‘We can afford $800,000 to $900,000,’ I say, ‘Guys, you are in a condo,’” said Shawn Zigelstein, a broker with Royal LePage Your Community Realty who works in the Toronto region.

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Since the start of the year, condo prices across the country have been rebounding. CREA’s home-price index for a typical condo increased 2.1 per cent on a seasonally adjusted basis to $505,300, the second consecutive monthly gain above 2 per cent. The last time condo prices rose at that pace was during the 2017 real estate boom.

Over all, the inventory of houses for sale remained near record lows, with shortages across most of Ontario. CREA expects activity to revert to normal levels through the rest of this year and into 2022. It forecast a 13-per-cent drop in resales from this year to next, and said home prices would remain flat.

“Limited supply and higher prices are expected to tap the brakes on activity in 2022,” CREA said.

The 2021 Demographia International Housing Affordability report shows a number of metropolitan cities are worsening, with Canada now holding two of the top five rankings. We compare what your money buys in Canada, and how far it goes overseas.

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