Get ready for house prices to actually drop next year?

Canada’s realtors are predicting the first decline in real estate prices on a national basis since 2008 and laying the blame for the drop on the federal government.

The Ottawa-based Canadian Real Estate Association, which represents about 100 boards across the country, says national sales activity in 2016 will rise 6.2 per cent from a year earlier to 536,700 and set a record in the process.

But 2017 will see a 3.3 per cent drop in sales and the average price of a home is expected to fall by 2.8 per cent to $475,900 after reaching a record $489,500 in 2016. The last time Canada saw a national home price decline was in 2008, although it was only 0.7 per cent drop.

“The government’s newly tightened mortgage regulations have dampened a wide swath of housing markets, including places not targeted directly by the government’s latest regulatory measures,” said Cliff Iverson, president of CREA.

Among the key changes brought in by the government in October was a stress test for any mortgage that is backed by Ottawa. Consumers must now qualify based on the posted five-year fixed rate, now 4.64 per cent, instead of the much lower rate on their contract.

Ratespy.com says consumers are currently able to borrow at as low as 2.18 per cent on a five-year fixed rate mortgage. Qualifying based on the posted rate has shut out some consumers because it ultimately means they must have the ability to pay a much higher monthly mortgage payment.

British Columbia, where realtors have complained about a 15 per cent additional property transfer tax on foreign buyers in the metro Vancouver area, is expected to drive much of the national decline in average price. Sales in the province are forecast to drop by 12.2 per cent next year and prices by 7.8 per cent, mostly because of a decline in single family homes. Ontario is forecast by CREA to see a 2.7 per cent decline in sales in 2017 but a one per cent increase in prices.

“Mortgage regulations were further tightened following CREA’s previous forecast. In the near term, tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets where there is a severe shortage of lower-priced listings,” the organization said in a release, to explain the revision of its forecast downward.

Just three months ago, CREA was forecasting average prices to reach $486,600 in 2017, which would have been a 0.2 per cent decline from its previous forecast for 2016 prices to reach $487,800. The 2016 updated forecast now calls for prices to reach $489,500.

“Tightened mortgage regulations and lending guidelines are also expected to increase capital costs for lenders, resulting in modest increases in mortgage interest rates in the New Year. These regulatory headwinds were not a factor at the time of CREA’s previous forecast, and have resulted in downward revisions to the forecast for sales and average price in 2017,” the real estate group said.

Royal LePage Real Estate Services, played down worries about house prices declining. “The Canadian economy as a whole has been making progress. I would call it healthy. The Canadian housing market, too, has been healthy — with the exception of Vancouver and Toronto. Some may find my statement surprising, because they confuse high price appreciation with a healthy market. When incomes are rising at three per cent and house prices at 20 per cent, that’s not healthy. That’s unbalanced. What we are now seeing in our largest cities, with moderating demand and slower or lower house prices, is the return to balance, and that’s a good thing,” he said, adding regulatory changes are playing an important role in moderating home price appreciation.

CREA’s new forecast was released on the same day as its monthly numbers for November, which showed the number of homes trading on the Multiple Listing Service system dropped 5.3 per cent from a month earlier on a seasonally adjusted basis — the largest percentage since August 2012. Sales are now at their lowest level since September 2015.

CREA said its Aggregate Composite index for the entire country was up 14.4 per cent in November from a year ago to $581,400 but the year over year increase was down from 14.6 per cent in October.

“Canadian housing market results for November suggest that Canada’s housing sector is unlikely to be as strong a source for economic growth as compared to before mortgage regulations were recently tightened,” said Gregory Klump, chief economist with CREA.

Robert Hogue, senior economist with Royal Bank of Canada, said declines in November were likely driven by changes in housing policy and rising interest rates but it’s still too early to say what the long-term effect will be.

“It will likely take more time to conclude with confidence that such is occurring as opposed to a short-lived phenomenon reflecting buyers and sellers shifting the timing of transactions. That being said, we expect that it should become clearer by early 2017 that the long-anticipated (and elusive) soft-landing scenario is unfolding,” he said, predicting a national 1.6 per cent decline in prices in 2017 and a 11.5 per cent drop in sales.