The Canadian Real Estate Association said Tuesday that 20,538 homes were sold across the country through its MLS system last month, down from 24,850 in December 2011, and 0.5 per cent lower than in November.
The increase in prices also continued to slow, tipping in at only 1.6 per cent from a year ago to $352,800 — about the level of overall inflation.
"The housing market is clearly in correction mode," said Derek Holt, vice-president of economics at Scotia Capital. "But this is certainly nothing even close to the U.S. and European experience and I don't think we're headed in that direction, but it's still sizable."
Prices and sales plummeted in the U.S. and many parts of Europe following the 2008 recession and have yet to fully recover, but analysts say Canada's fundamentals are markedly different, particularly since lending criteria has been stricter and Canadians hold more equity in their homes.
Still, the Bank of Canada has acknowledged its low-interest rate policy has likely encouraged marginal buyers to enter the market with big mortgages, inflating demand and prices.
Analysts note sales are down by double digit margins since Finance Minister Jim Flaherty tightened mortgage rules in July to cool the market, adding it needed correction to avoid a bigger problem in future.
"We damped the markets. It's worked. I'm pleased with that," Flaherty said on BNN.
"It's not the only factor of course," the finance minister added. "There's been a softening of the market. We still haven't seen prices come down but we have seen a softening in demand which I think is healthy for the market."
CREA chief economist Gregory Klump said he believes the new rules, on top of three previous rounds of tightening, have had an impact.
Since July, the market has experienced contractions in sales, construction, building permits and property listings.
The only anomaly is prices, which have continued to rise, although at a more measured pace.
"That's the only surprise, that the prices didn't go down," said Benjamin Tal, a senior economist with CIBC World Markets.
"Everything else is according to plan. The decline in activity is what we expected to see and what we wanted to see, but I still believe those positive numbers (in prices) are temporary and will come down."
Both Tal and Holt are calling for a national price decline of 10 to 15 per cent in the next few years, which they term a soft landing given how high prices have climbed in the last decade.
Industry observers say some homeowners may be delaying sales to await better conditions, keeping the supply of properties low and supporting prices, but Tal believes that strategy has its limits. Historically, prices follow sales volumes with several months of lag time.
Tuesday's report already points to some evidence of softening prices, particularly in Canada's hottest housing markets, Toronto and Vancouver. Excluding those two markets, the average price would have risen 3.3 per cent over the past year, twice the actual increase.
CREA said price gains in Greater Toronto moderated to 4.1 per cent in December, while Greater Vancouver posted a 2.3 per cent decline. The strongest price gain came in Regina — 10.5 per cent — although that increase was the smallest since March.
For the past year, a total of 453,372 homes were sold through the Multiple Listing Service system, down 1.1 per cent from 2011, and 1.4 per cent below the 10-year average.
New listings were down in half of all local markets in December, CREA said.
Nationally, the number of newly listed homes fell 1.3 per cent month-over-month in December following a 1.1 per cent drop in November and 4.1 per cent in October.
CREA's national sales-to-new listings ratio was 50.8 per cent in December compared with 50.4 per cent in November.