Source: The Canadian Press

Canadian home prices dropped in August for the third time this summer and one economist predicts they could fall as much as 7% next year as fewer buyers compete for a growing number of houses for sale.

The average price of a Canadian home was $324,928 last month, down from $330,351 in July, and $342,662 in June, said a report Wednesday from the Canadian Real Estate Association.

Meanwhile, another report from TD Bank predicted prices could fall another 7% — about $23,000 based on the August figures — as supply outstrips demand over the next year.

The monthly sales figures from the real estate brokers’ lobby were consistent with recent reports that show the Canadian housing sector is slowing down and prices are dropping across the country.

Not only is the recovery from the recession slowing, but mortgage rates have risen, banks are tightening their lending rules and new taxes in Ontario and British Columbia have added thousands of dollars to the cost of buying homes in those provinces.

With consumer confidence flagging and household debts high, many potential homebuyers are deciding to wait. While that’s bad news for sellers, a glut of supply provides opportunities for buyers who had been scared away from the market by bubble-like prices earlier.

TD Bank economist Francis Fong predicted in another report Wednesday that existing home prices will drop by 7% as the market continues to cool and sales fall by as much as 20% in 2011.

“In an environment characterized by highly indebted Canadian households, a moderation in job growth and personal income, and the fact that demand was frontloaded in 2009, we expect the cooling in the housing market to continue through the remainder of 2010 and throughout the entirety of 2011, “ Fong wrote in the report.

The real estate association report noted that average home prices were about the same in August as they were a year earlier, when a house cost $324,843, even though sales dropped 22%.

The group also said prices rose or were stable in nearly two-thirds of all local markets year over year, an indication the sector remains strong, even though it’s slowing down.

Douglas Porter, deputy chief economist at the Bank of Montreal (TSX:BMO), said the flat year-over-year numbers suggest home prices have finally started to moderate in line with falling sales.

“Average home prices were officially unchanged from year-ago levels in August,” Porter wrote in a report, adding that “we still expect that average prices will post some modest year-on-year declines by the end of this year.”

There were 32,800 transactions on CREA’s Multiple Listing Service in August, up 4.1% from July on a seasonally adjusted basis, bucking a months long downward trend in sales.

But Fong said the increase in sales was an anomaly largely concentrated in British Columbia and Ontario, where home sales took a huge hit in July following the introduction of the harmonized sales tax.

Buyers in those provinces, Canada’s hottest housing markets, rushed to buy before the introduction of the HST, which applies to real estate services and some home purchases that had previously been exempt.

Sales have been falling steadily in recent months as demand moderates and more owners put their houses on the market.

The number of new listings in August was more than double the number of sales, a clear indication the market is now considered balanced, Porter said.

As a result, it would take nearly seven months for all the listings to be sold at the current pace — a slight improvement from July but still relatively high.

Many potential buyers raced into the market while mortgage rates were at historic lows and before changes to mortgage qualification standards in April.

Gregory Klump, CREA’s chief economist, said the high sales activity late last year and earlier this year borrowed from sales that otherwise would have transpired this summer, and will continue to do so over the coming months.

“This makes the return to more normal levels of sales activity look like a steep downward trend,” Klump.

Porter said the cooling is progressing at a healthy pace as a renewed slide in longer-term mortgage rates in recent weeks will help to offset a slow but steady increase in variable rate mortgages.

“While home sales are still nursing a bit of a hangover from the real estate party in the first half of the year, it looks like conditions are stabilizing,” he said.

“Looking ahead, sales are expected to remain on the soggy side with consumer confidence dimming, but should find support in still-low rates and steady job growth.”