Canadian home prices declined for the second straight month as surging borrowing costs spur a rapid turnaround in what had been one of the world’s hottest housing markets.

Canada’s benchmark home price fell 0.8 per cent to $822,900 (about US$635,000) in May from the month before, data released Wednesday by the Canadian Real Estate Association show. Cities in Ontario showed the biggest declines. 

That came amid a sharp drop in the number of sales, which fell 8.6 per cent from the previous month, the association said. 

The drop comes after Canadian home prices shot up more than 50 per cent over a two-year period as record low interest rates and pandemic-induced demand for larger living spaces led to bidding wars for properties.

Now, as the central bank tries to rein in inflation that’s running at nearly 7 per cent, mortgage rates are rising quickly and policy makers have identified high house prices and heavily-indebted homeowners as major vulnerabilities to the economy. 

“May picked up where April left off, with sales activity continuing to slow and softening prices in many parts of the country,” CREA Chair Jill Oudil said in a statement accompanying the data. “We are in a period of rapid change, but one that should settle to a more balanced housing market in time.”

Driving the changes is the Bank of Canada, which has raised its key policy rate from 0.25 per cent to 1.5 per cent since the beginning of March, while signaling even more aggressive increases could be coming next month. 

Last week, at its annual review of the financial system, the central bank said those who bought a house during the pandemic could become vulnerable as rates rise because they took on high levels of debt to do so, and the meager equity they’ve built up so far could be wiped out as prices fall.

But so far, the cooling in the national housing market has only brought it back to more historically normal levels. The drop in sales in May brought the total number close to the 10-year average for the month. The ratio of sales to new listings, a measure of market tightness, fell to 57.5 per cent -- a three-year low that is close to its longer-term average, data from the real estate association showed. 

Even with the rise in listings, Canada had just 2.7 months of housing inventory available on the market at the end of May, about half the longer-term average, the data show.

A separate report released Wednesday by the Canada Mortgage & Housing Corp. showed supply ramping up as housing starts rose 8 per cent in May to an annualized pace of 287,300 units, exceeding economists’ expectations.