A hot real estate market in Vancouver helped drive home sales in Canada higher in May and push the average price was up 8.6 per cent, according to the Canadian Real Estate Association.

The average price in Vancouver, far and away Canada's most expensive market, was up 25.7 per cent to $831,555, while the number of home sales in that area was up 7.2 per cent from a year ago.

BMO deputy chief economist Doug Porter noted the Canadian housing market appears to have enjoyed a healthy spring selling season, while Vancouver marched to its own drummer.

"Quite simply, no other city in the country is seeing anything remotely close to what's unfolding in Vancouver," Porter wrote.

"In fact, many large cities have posted price declines over the past year, notably Calgary, Edmonton and Halifax."

Porter said Vancouver's average price was driven by sales of high-end homes but even so, the price of a typical home was up 6.2 per cent from a year ago at $627,000 and still the highest in the country, according to the Vancouver Real Estate Board.

The number of homes sold in Canada last month was up 2.3 per cent from a year ago, when home sales dropped off after months of heated activity. The national average price in May gained 8.6 per cent to $376,817, driven by strong gains in Vancouver and Toronto.

Excluding Vancouver, the average national price was up 5.6 per cent, while excluding Vancouver and Toronto, the national average was up 3.7 per cent.

Sales down over one month

"The Canadian housing market has seen some big ups and downs in recent years, making national sales activity so far this year look like something of a Goldilocks story by comparison — not too hot, not too cold," said Gary Morse, president of the Canadian Real Estate Association.

While sales compared with a year ago were higher, they were down slightly from the previous month. The number of homes sold in May was down 0.6 per cent from April, while the average price was down 0.1 per cent.

Housing prices have been supported by interest rates which have remained near historic lows and expectations that the Bank of Canada would raise to its key rate — which affects variable rate mortgages — later this year.

Canada's big banks have cut their residential mortgage rates in recent weeks as the weak U.S. economic recovery has put downward pressure on general borrowing costs.

The lower mortgage rates reflect the lower cost of borrowing in the bond market, where banks finance their home loan lending.

TD Bank economist Diana Petramala said Canada's home real estate market will likely remain well supported through most of 2011 by low interest rates.

"As interest rates begin to climb through 2012, a further deterioration in housing affordability will weigh on demand, and home prices are expected to fall," she wrote in a note to clients.

"That being said, continued improvements in the Canadian labour market, and only gradual increases in interest rates will help the resale housing market avoid a 'hard landing."'