British Columbia’s tax on foreign real estate buyers is having its desired effect, dragging home prices down from dizzying highs compared to the rest of Canada, according to research from BMO Nesbitt Burns. However, the Canada Mortgage and Housing Corporation (CMHC) warns Vancouver continues to be plagued by “problematic conditions.”

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The additional 15 per cent property charge on foreign buyers has seen a steep drop in real estate transaction in the Vancouver area since it was introduced last summer. The MLS Home Price Index, a tool used by Canadian Real Estate Association to monitor price fluctuations, now shows prices trending downwards as well.

“We have enough history now to distinguish the clear divergence between Vancouver (down) and Toronto (still straight up),” said BMO Chief Economist Douglas Porter in a research note on Tuesday.

Meanwhile, Toronto and Victoria – two of the Canada’s hottest real estate markets where foreign investment is unchecked – have shown continued price increases.

“In case there was any doubt what force was at place, note that Victoria has tracked closer to Toronto’s behaviour than Vancouver’s,” Porter wrote.

The CMHC downgraded its outlook on overheating in the Vancouver market from moderate to weak in its latest quarterly Housing Market Assessment released Thursday, as sales fell more in line with the number of new listings.

However, the agency also noted “moderate evidence of price acceleration and strong evidence of overvaluation.”

While housing demand in Vancouver has cooled, the supply of new and resale homes remain below the 5-year average level.

Single-detached homes, in particular, continue to command a premium above what financial, economic and demographic trends would indicate.

“Considering all factors, the overall assessment for Vancouver indicates strong evidence of problematic conditions,” said the report’s authors.

December saw residential sales decrease 39.4 per cent from a year earlier, according to data from the Real Estate Board of Greater Vancouver. The benchmark price for a detached home ended the year at $1,483,500, 18.6 per cent higher than the same time last year.

Economists are projecting Vancouver sales and prices will continue to slump into 2017, following the city’s third highest selling year on record last year.

Vancouver ranked number three on a recent list of the least affordable housing markets in the world in the 2017 Demographia International Housing Affordability Survey.

While the impact of the B.C. government’s intervention in Vancouver has yet to be fully realized, “extremely poor affordability” remains a key risk, according to RBC chief economist Craig Wright.

“The market is still adjusting to the recent policy measure to address housing risk,” he wrote in a note to investors on Thursday. “The market has cooled off significantly and home prices are coming under downward pressure. However, a crash is unlikely given still-solid economic underpinnings.”