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Minister of Finance Jim Flaherty speaks with the media in the foyer of the House of Commons in December 2012. Mr. Flaherty has said he doesn’t mind house prices coming down a bit.Adrian Wyld/The Canadian Press

Finance Minister Jim Flaherty says he's happy that the rapid increase in Canadian home prices is over. In fact, he would be pleased if the housing market softens further.

"I don't mind prices coming down a bit, too," he said in an interview, after the latest data showed that home sales fell sharply in December compared with a year ago.

The figures, released Tuesday by the Canadian Real Estate Association, include all sales of existing homes, or resales, over the Multiple Listing Service.

Having grown concerned that low interest rates were spurring consumers to take on too much mortgage debt and bid house prices up too high, Mr. Flaherty took steps this summer to make it harder to get a mortgage. The new rules, which took effect on July 9, included cutting the maximum length of an insured mortgage to 25 years from 30.

Home sales, in the wake of that move, have been much lower than they were in the same period in 2011. Observers have been watching to see whether that trend continues, and whether the softer sales cause prices to fall. So far, prices nationally have still been rising, but the pace at which they're growing has slowed.

Major decline in national sales

The Canadian Real Estate Association released the latest data Tuesday, showing that 20,538 homes sold over the Multiple Listing Service in December. That's down 17.4 per cent from a year ago, the biggest annual decline since Mr. Flaherty imposed the new rules.

"I am actually pleased, because we needed to take some of the steam out of the rapid increases in prices in the residential housing market, particularly the condominium market," Mr. Flaherty told The Globe after the numbers were released.

The decline in sales in the second half of the year effectively erased the gains that had occurred earlier in the year. All told, 1.1 per cent fewer homes changed hands in 2012 than in 2011.

In Mr. Flaherty's opinion, the reduction in market activity is a good thing. If prices fall a bit, all the better.

Average prices are stable

The MLS Home Price Index has been declining month-to-month since July. The index is a more accurate measure of house prices than the average selling price because it seeks to account for any change in the mix of sales (for instance, if more condos sell in one period and more expensive single-family homes in another) and arrive at an apples-to-apples comparison of the underlying prices. In total, it has dropped 1.5 per cent since July, according to Royal Bank of Canada economist Robert Hogue.

Prices are still higher than they were a year ago, but the rate at which they are rising on an annual basis has been petering out, and hit its slowest level of the year in December.

The average price of homes that sold over the MLS last year was $363,740, up just 0.3 per cent from 2011. The average price of a home that sold in December was just under $352,800. The numbers are dragged down by Vancouver, where sales began falling earlier than the rest of the country, and prices followed suit. Prices in much of the rest of the country have remained solid so far.

"While sales have skidded, average prices are holding up nicely," said Bank of Montreal economist Benjamin Reitzes.

Will home prices continue to hold up?

Toronto-Dominion Bank economist Sonya Gulati says Mr. Flaherty's July rule changes have probably had all the impact that they are going to on prices.

July marked the fourth time in as many years that Mr. Flaherty has changed the rules in order to make it harder to get a mortgage. Ms. Gulati and her colleagues have studied the previous changes and determined that "while home prices took an immediate hit following the rule changes, they bounced back within two or three quarters and continued to grow faster than underlying economic fundamentals."

That is because low interest rates are still giving Canadians a reason to take on large mortgages.

Similarly, Ms. Gulati expects the market will stabilize at the current levels in the next few months.

The number of new listings has fallen 6.5 per cent since September, while existing home sales have fallen 2.8 per cent in the same period, Mr. Hogue points out. With sales dropping, fewer people are putting their homes on the market. That could support prices, as buyers bid for the homes that are available.

Is that a good thing?

Many economists side with Mr. Flaherty, believing that prices are higher than they should be and that a mild correction would be a positive development. If the July changes don't have a lasting impact and Mr. Flaherty doesn't tighten the rules again, then a drop in prices is unlikely to occur until interest rates rise, Ms. Gulati suggests.

"The sales-to-listings ratio and the number of months of unsold inventory are well within the normal range," she wrote in a research note. But if you compare prices to other measures, like income levels, they still appear too strong, she suggests.

"With this in mind, house prices will likely resume their trek downwards once higher interest rates come into effect in the fourth quarter of 2013."

In other words, while home prices are unlikely to drop significantly during the first nine months of this year, Mr. Flaherty – and homeowners – might finally see that decline in prices once the Bank of Canada raises interest rates.

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