TORONTO - Home sales could be stronger this month as buyers in two of Canada's busiest real estate markets rush to close deals before a new regime tax kicks in, says the chief economist Canadian Real Estate Association.

After that, sales levels will likely drop back to lower levels like those reported in May, Gregory Klump said Wednesday as CREA released its latest monthly sales figures.

"It's going to be a bit of a choppy ride between now and the second half of this year, so there may still be some pull forward in June with respect to people getting in in advance of the coming (harmonized sales tax) in B.C. and Ontario," Klump said.

The harmonized sales tax starts July 1 in both provinces and will apply to real estate services, which had previously been exempt from provincial sales taxes. It will also increase taxes on sales of new homes over $400,000.

Meanwhile, home sales in May, usually the busiest month for real estate, took a plunge from April as buyers hurried to get in ahead of higher mortgage rates and stricter lending rules, according to CREA statistics released Wednesday.

Seasonally adjusted home sales in May departed from historical averages to drop by 9.5 per cent nationally from near-record activity the month before.

"It's a shifting forward of sales," Klump said.

Klump said the combination of tighter mortgage regulations — which now require all homebuyers to qualify for a standard five-year, fixed-rate mortgage — and rising interest rates pulled a number of sales forward into April that might otherwise have taken place later in the year.

The Bank of Canada's signal in April that it was no longer committed to keeping interest rates at historic lows and the coming HST also pulled sales forward, Klump added.

CREA said home sales fell 4.3 per cent compared to May 2009, while new home listings rose 16.6 per cent from May 2009 but were down when compared with April.

The seasonally adjusted number of new listings dropped by four per cent from April, marking the first monthly decline in eight months. New listings had been climbing sharply, rising from a four-year low last September to the second highest-level ever in April.

Home prices were up 8.5 per cent in May, but that was a slower increase than has been seen over the past nine months.

Pascal Gauthier, a senior economist at TD Economics, said pent-up demand from the recession has now been fully absorbed and is no longer providing a boost to sales. He predicted that average home prices will slow as early as this month and pull back by about seven per cent from peak levels by the end of 2011.

Economists have widely predicted a slowdown in the housing market during the second half of the year. Many buyers hurried to close in late 2009 and the first half of this year to take advantage of record low interest rates.

Douglas Porter, deputy chief economist at BMO Capital Markets, said after sales "ran into a wall" in May, activity is "straddling the fine line between a sellers' and buyers' market."

"Life in the fast lane is over for Canada's housing market. Now the question is whether it will stay in the middle lane or brake even more aggressively," he said.

"We suspect it will brake harder, although the ongoing revival in employment will likely keep the housing market from veering onto the shoulder."

May's drop in sales activity was seen in more than 70 per cent of local markets, but the lower national figure was dragged down primarily by fewer sales in Toronto, Vancouver and Ottawa.

Klump said statistics gathered by the association suggest that home supply and demand was more balanced in some major markets in May, giving home buyers more choice and more time to purchase a house.

"It's not a matter of throwing your house on the market asking a king's ransom, expecting multiple offers to come in over your asking price any more, that's in the rear view mirror," he said.

The total number of homes listed for sale on the MLS in May was up 5.4 per cent from last year, when the supply of homes for sales had started to decline.

However, he added, the number of newly listed homes will retreat in response to rising prices and a more competitive sales environment.

Klump said the outlook for the Canadian economy, employment and mortgage market trends remain upbeat, so the market will remain balanced and Canada will avoid a U.S.-style home price correction.