The average price of a home in Canada crept higher in the third quarter, according to a survey by Royal LePage, but the real estate company warned a softening in prices may be just around the corner.
Royal LePage said Wednesday the average price of a home in Canada rose between 1.8 and 4.8 per cent in the third quarter, depending on the category, but the number of homes sold was slipping.
Fewer homes trading hands, the company said, typically precedes a period of softening prices as sellers adjust their expectations and cut prices.
"During the third quarter, unit home sales were positive in July, fell nine per cent year-over-year in August and we are expecting September to show a decline as well," Royal LePage chief executive Phil Soper said.
"We had predicted this cyclical change early in the year, a natural market reaction after a period of strong expansion. Changes to mortgage regulations, which took effect on July 9, accelerated the correction."
Among the changes to tighten the lending rules, Ottawa cut the maximum amortization period for government insured mortgages to 25 years from 30 years, making monthly payments more expensive, but reducing the amount of interest paid in the long term.
The government also moved to place debt-to-income restrictions and ended government mortgage insurance for homes worth more than $1 million.
It was Ottawa's fourth intervention in the mortgage market in just four years.
Economist David Madani of Capital Economics has predicted house prices will decline by 25 per cent over the next year or two as the housing bubble in Canada bursts.
"I think for quite a few years the market has been driven by psychology," he said.
"What I mean by that is the expectation that house prices only go up, and that's why for quite some time people have continued to buy houses even though the valuations are very rich and very severe in some cases."
Madani noted that although prices have held steady in recent months, with falling sales, he predicted they will come down as sellers adjust to lower demand.
"That time lag can vary, it isn't a precise science, the more desperate they are they might drop it sooner," he said.
The outlook by Royal LePage came as the Toronto Real Estate Board reported Wednesday the number of sales in its region though the MLS system fell 21 per cent compared with a year ago, though it noted there were two fewer working days this year.
The board said there were 5,879 home sales last month, down from 7,422 in September 2011, however the average selling price increased more than eight per cent from a year ago to $503,662 from $463,916.
"While sales have been lower due to stricter mortgage lending guidelines, we continue to see substantial competition between buyers," Toronto Real Estate Board president Ann Hannah said.
"The months of inventory trend remains low from a historic perspective, which explains the strong price increases we are experiencing."
On Tuesday, the Real Estate Board of Greater Vancouver said home sales fell 32.5 per cent in September compared with a year ago.
Royal LePage said the cost of an average two-storey home in Canada increased four per cent to $403,747, while detached bungalows rose 4.8 per cent to $366,773.
Standard condominiums saw an increase of 1.8 per cent to $243,607, and while most cities experienced modest price appreciation in the quarter, fewer homes were sold compared to the same period in 2011.