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With the introduction of the B.C.’s foreign buyer tax, Canada’s two hottest housing markets now appear to be on diverging paths.

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Vancouver house prices could drop 10 per cent by the end of next year, as the introduction of a new tax on foreign buyers helps speed up a market correction, Toronto-Dominion Bank economists warned in a new report.

House sales in the Vancouver region will fall 3 per cent this year and more than 22 per cent next year, wrote TD economists Derek Burleton and Diana Petramala.

By the end of next year, prices should fall 10 per cent below their peak in April of this year, the economists wrote. They predicted Vancouver house prices would continue to fall another 2.3 per cent in 2018.

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Vancouver's housing market experienced a similar drop in house prices over two years between 2010 and 2012.

But the economists warned this correction will likely come much faster because of British Columbia's introduction of a 15-per-cent tax on sales to non-resident buyers in the Vancouver region, which took effect this month.

"The timing and targeted nature of the new tax on foreign buyers and the frothier market conditions currently could result in a quicker price hit this time around," they wrote.

Related: Find your neighbourhood's home prices with the Globe's interactive data centre

Related: B.C. real estate reform: What you need to know

Related: Four charts that explain the impact of the Vancouver-region's foreign buyer tax

The Real Estate Board of Greater Vancouver is set to report on August's house sales on Friday, offering the first official glimpse at how B.C.'s tax has affected the market. TD's economists expect Vancouver house prices to end the year up 16 per cent, largely because of a soaring market in the first half of the year.

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Yet the foreign-buyers tax comes even as the Vancouver market was already showing signs of cooling down. Resale house transactions fell 20 per cent in July from a year earlier, while new house construction hit a record high. Juwai.com, a website that markets international real estate to Chinese-language buyers, reported that searches for Vancouver houses worth more than $1-million plunged 55 per cent in the past month, in part because of "very dramatic and abundant" media coverage in China of the new tax.

Even so, Juwai said Chinese buyers had already been shifting their focus away from Vancouver to more affordable markets. Nearby Seattle is now the site's most-searched North American city.

"The shift to other cities has actually been going on for months, with buyer demand momentum shifting to other cities with similar appeal but lower entry prices," Matthew Moore, Juwai's president of the Americas, wrote in an e-mailed statement.

With the introduction of the B.C.'s foreign buyer tax, Canada's two hottest housing markets now appear to be on diverging paths.

Even as Vancouver appears set for a substantial price drop over the next year, TD's economists expected Toronto to continue to hit new records this year.

House prices have soared more than 16 per cent in Toronto since July, 2015, and the TD economists expected the market to continue to experience double-digit price growth and record sales numbers.

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Toronto's high-end market has seen particularly strong growth so far this year, in contrast to a drop in luxury house sales in Vancouver. That's likely a sign of increasing interest from foreign investors in Toronto's more affordable luxury market, the economists said.

Also unlike Vancouver, Toronto has not seen a jump in houses listed for sale, in part because red tape has lengthened the time it takes developers to finish building houses and because fewer homeowners have opted to put their houses up for sale this year.

Despite strong price growth, Toronto's housing market still appears to have room to run. Housing affordability has waned in Toronto over the past year, but not as dramatically as in Vancouver, wrote Royal Bank of Canada economists Craig Wright and Robert Hogue in a new report.

In Vancouver, it now takes 126 per cent of the median pretax monthly household income to cover the annual costs of owning a typical single-family house, up 29 per cent from a year ago. By contrast, a similar property would take 72 per cent of median household income in Toronto, an increase of 6.6 per cent from a year earlier.

Still, several economists are calling for both markets to eventually cool. TD's Mr. Burelton and Ms. Petramala predict that Canadian government bond yields will rise as much as 90 basis points by the end of 2018, helping to push up mortgage rates. (A basis point is 1/100th of a percentage point.)

A single percentage point increase in mortgage rates would force average home buyers to shell out an extra 6.2 per cent of their monthly income to pay their mortgages, said RBC economist Laura Cooper. That will put the brakes on house prices in both Toronto and Vancouver.

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TD's economists wrote, if interest rates don't rise in the next few years, the bank's predictions for a soft landing in Toronto and Vancouver could turn into fears of something much worse. "In light of this year's continued build-up in froth, the risks of a severe and painful correction have significantly increased," they wrote.

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