Canada's home sales fell in July, with Ontario and British Columbia leading the way lower as the newly introduced harmonized sales tax slowed activity in those provinces.

The Canadian Real Estate Association said Monday a total of 31,536 homes were sold in July, compared with 33,836 in June.

A real estate agent puts up a sold sign in front of a house in Toronto in April. The Canadian Real Estate Association says the country's home sales fell in July as the HST slowed activity in B.C. and Ontario. (Darren Calabrese/Canadian Press)

Declines in the country's most expensive markets — British Columbia (down 14.1 per cent) and Ontario (down 8.0 per cent) — accounted for most of the change in national activity.

But the agency said the overall decline was smaller than in the previous two months as July sales in the Prairies and Quebec came in on par with June levels.

"It looks like anyone who wanted to buy a house this year in Canada got their shopping done early," said Doug Porter at BMO Capital Markets.

"The combination of tighter mortgage insurance rules, a modest backup in borrowing costs, and the HST have delivered a hammer blow to sales — with a soupçon of economic uncertainty making the temporary hit even harder than expected."

The slowdown in demand in B.C. and Ontario was widely expected as many people scrambled to buy homes ahead of the July introduction of the harmonized tax in those provinces.

"The soft sales figures we're seeing right now can be attributed in part to accelerated home purchases earlier in the year," CREA president Georges Pahud said in a release.

"Activity may remain at lower levels for some time, but ultimately we expect a more stable market to emerge, with demand coming back into line with economic fundamentals."

Average house price lower

The average price of homes sold in July was $330,351, edging up one per cent from the same month last year. But that was down considerably from the average of $342,662 in June.

Year-to-date transactions are still up 5.6 per cent, compared with the first seven months of last year. But the agency expects this gap to continue to narrow as activity rose sharply over the second half of last year, reaching levels that are unlikely to be matched in the final five months of 2010.

New supply continued to adjust to lower demand. The seasonally adjusted number of new residential listings declined by 7.2 per cent in July 2010, compared with June.

This is the third consecutive month-over-month decrease and the steepest in more than a decade. Since reaching a peak in April, new listings have fallen 17.5 per cent.

Last month, CREA said national sales activity is expected to drop 1.2 per cent to 459,600 units in 2010 as interest rate increases in the second half of the year keep homebuyers in a cautious mood.

Lower expectations

Although the introduction of the HST and the expectation of higher interest rates were contributing factors to the decline, Queen’s University professor John Andrew said there were "greater forces at play."

“While the average home sale price was higher in July than one year ago, prices will inevitably fall in response to a large oversupply of homes on the market," he said. "The unprecedented large rise in house prices between 2000 and 2009 is unlikely to be sustainable over the next few years."

Andrew cautioned homeowners "to downgrade their expectations for how the wealth in their home will grow."