Rapidly changing market conditions have led the Canadian Real Estate Association to lower its forecast for housing sales this year.

The Ottawa-based group, which represents 100 boards across the country, now says 2010 sales will not be as strong as previously forecast and by next year prices will begin falling.

CREA expects 490,600 sales through the Multiple Listing Service in 2010, a 5.5% jump from a year earlier and the second-best year on record. However, by 2011, sales are expected to fall by 8.5%.

“The revision reflects a weaker-than-expected start to the year in British Columbia, and recent developments that pulled forward the timing as to when sales are expected to ease in other provinces,” the group said in a statement.

A major factor pushing people into the market earlier has been new mortgage rules that went into effect April 19. Canadians buying homes with mortgage default insurance must now qualify based on what is called the benchmark rate for a five-year fixed-rate closed mortgage, if they opt for terms of under five years.

The impact has been that borderline borrowers get less cash for their homes because they must qualify based on a rate that is 6% today. Consumers going for terms five years or longer can qualify based on the rate on their contract, which is as low as 4.25% for a five-year mortgage based on discounting.

The rules have forced many consumers out of variable rate mortgages tied to prime, which even after yesterday’s Bank of Canada rate hike, stood at 2.5%.

“The changes prompted some homebuyers to finance their home purchase before the new regulations took effect in April, which pulled forward a number of sales that would have otherwise taken place at a later date,” said CREA.

With the Bank of Canada on Tuesday finally increasing its overnight lending rate, which prime tracks, that too is expected to impact home sales in the coming months. “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,” said Georges Pahud, CREA president.

CREA now says the market peaked in the fourth quarter of 2009 and predicts by next year the average price of a home sold through the MLS will be $318,300, a 2.2% decline from 2010. This year’s average price increase is now expected to be only 1.6% higher than 2009.

Average price increases were previously forecast to rise 5.4% in 2009, but the lower sales activity in British Columbia, which includes the country’s most expensive market in Vancouver, drove down the national numbers. In fact, only B.C. and Ontario are not expected to post price gains in 2011.

“With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates,” said Gregory Klump, chief economist with CREA. “A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. In keeping with the return of a balanced housing market and typical demand-driven housing market cycle dynamics, prices will remain stable.”

Mr. Klump emphasized that Canada’s mortgage market remains “solid,” and that conservative lending practices mean the country will not experience the same type of correction the United States has had where prices have fallen as much as 50% in some markets.

Last month, CREA issued a report debunking the theory put forward by a number of commentators that the Canadian housing market was headed for a major correction. The report came on the heels of an analysis from Canadian Imperial Bank of Commerce senior economist Benjamin Tal that housing prices in Canada were 14% overvalued.