The first quarter of 2018 was a particularly rough one for the Canadian housing market, which saw sales plunge year-over-year for three consecutive months.

It was a particularly dramatic drop in activity when compared to Q4 2017’s surge of activity. Why the difference between the two quarters? According to BMO senior economist Benjamin Reitzes, it had a lot to do with a new mortgage stress test that came into effect on January 1.

“Housing was one of the bigger negatives to start 2018, as new mortgage rules…have driven homes sales down over 40 per cent [year-over-year],” he writes in a recent note. “Not that home sales alone added 0.7 points to [GDP growth] in Q4; that’s going to reverse…in Q1 [of 2018.]”

Reitzes predicts that new data from the Canadian Real Estate Association, set to be released later this week, will see national home sales drop 17% year-over-year in March.

“The broader market continues to adjust to stricter mortgage regulations, with Toronto cooling sharply amid a 40% plunge in activity,” he writes.

He notes that the BC market has also had to adjust to an increased foreign buyers tax, introduced last month as part of the province’s budget.

“The weakness in the high end of the Toronto and Vancouver markets helped knock average prices down 5% year-over-year, while the quality adjusted MLS HPI is expected to decelerate to an increase of 6% year-over-year, which would be the slowest increase in nearly three years,” he writes.

One bright spot? Ottawa saw a huge surge in activity in the first quarter of the year. “Ottawa was one of the few bright spots with sales up double-digits (thank you higher federal government spending),” writes Reitzes.

And, according to several industry watchers, it is unlikely that the rest of the market will stay cool for long.

“All in, we expect policy-related turbulence…to negatively impact sales in the near term, before some stabilization in activity beings to take hold mid-year,” write TD economists Michael Dolega and Rishi Sondhi, in a recent note.

Here’s Why The Canadian Housing Market Saw A “Dramatic Difference” Between Last Quarter & This One by Sarah Niedoba | Buzz Buzz Home