A new report says Toronto's land transfer tax is hurting the city's real estate market. (CBC)

The C.D. Howe Institute says Toronto's land transfer tax is causing potential homebuyers to look outside the city.

The institute says the impact of the tax on real estate transactions and prices in Toronto has translated into a drop in the number of homes sold and the price sellers are able to get.

Since the city introduced the tax last February, home sales have fallen 16 per cent and the average sale price of a Toronto home has dropped 1.5 per cent.

The authors of the report "calculate the [land transfer tax] will cause a reduction in household mobility … and an average reduction in selling price of about $6,400 per house."

Von Palmer, spokesman for the Toronto Real Estate Board, says it is clear the city should never have brought in the tax.

"Our predictions were bang on," he said. "We did warn them that this would hurt the economy."

But city budget chief Shelley Carroll says the report doesn't prove the tax has any bearing on Toronto's housing market.

"There's a slight dip in Toronto's housing numbers," said Carroll. "It follows the same trend for the GTA and all of Canada."

The report's authors say they took into account other factors affecting the housing market. But Carroll says the real estate market is too complicated to single out the land transfer tax as the sole reason for a downturn.