The Canadian Real Estate Association forecast Wednesday that home prices will fall by 2.2 per cent next year.

A real estate sign sits outside a home for sale. The agency that governs realtors in Canada expects the average price of a home to fall in 2011, the result of slowdowns in B.C. and Ontario. (M. Spencer Green/Associated Press)

The agency expects the average price of a home in Canada to be $325,400 by the end of 2010, a 1.6 per cent increase over 2009's level. Though still a gain, that's well below the 5.4 per cent increase the agency was previously expecting for 2010.

But by 2011, the agency expects a 2.2 per cent decline in the average price. That's because a slowdown in Ontario and British Columbia, the two largest housing markets in the country, will drag the national average down. All other provinces are forecast to post gains, CREA said.

"With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent price increases and rising interest rates,” CREA chief economist Gregory Klump said.

Forecast of sales decline

Sales activity overall is forecast to slow. CREA now forecasts that 490,600 homes will be sold on its Multiple Listings Service this year. That's 5.5 per cent higher than the level in 2009, but much lower than the agency was originally forecasting for 2010.

In 2011, an 8.5 per cent drop to 448,700 is expected.

New mortgage rules unveiled by Finance Minister Jim Flaherty in April aimed at curbing speculation are expected to "marginally impact" activity, the agency said.

Although mortgage rates have gone up and are expected to rise further, the association says the higher cost of borrowing will have a minimal impact on the market this year.

"Interest rates are expected to rise slowly and at a measured pace during a new era of government spending restraint, so home financing will remain within reach for many homebuyers," CREA president Georges Pahud said.