A sharp drop in the number of luxury sales in the Greater Toronto Area pulled down housing prices nationally last month as the country's largest real estate market cools off and braces for higher interest rates.

The average price in Canada of residential properties sold in July slipped to $478,696, down 0.3 per cent from the same month in 2016 – the first year-over-year decline nationally since February, 2013.

The number of Canadian home sales slumped in July to 42,238 transactions, an 11.9-per-cent decrease compared with a year earlier, the Canadian Real Estate Association said Tuesday. The slowdown marked the fourth consecutive time that sales volume fell month over month in Canada.

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Economists say a new tax in Ontario has crimped demand in the GTA while the housing supply crunch has eased. Ontario's 15-per-cent tax on foreign home buyers took effect on April 21 and applies to the Greater Golden Horseshoe region, a sprawling land base that surrounds and includes the GTA.

"I would argue that the bigger impact has been psychological on speculative activity that was ramping up in the GTA," BMO Nesbitt Burns Inc. senior economist Robert Kavcic said in an interview. "The Ontario policy changes themselves kind of sent a message that we're not going to get price growth but a price correction. That probably caused speculators and potential buyers to step back to the sidelines."

Mr. Kavcic said the GTA may experience a longer recovery period than what the Vancouver region went through over the past year. The B.C. government slapped a 15-per-cent tax on foreign home buyers in the Vancouver area in August, 2016, a move that helped dampen the B.C. market before it started bouncing back in the spring.

"Throw in a Bank of Canada rate hike in the equation, which we got in July. Rates have risen once and they're probably going to rise again this year," Mr. Kavcic said. "It looks like the price correction in the GTA is running a bit deeper than in Vancouver, and possibly going to play out a bit longer. A rising rate environment is another headwind not just on affordability but overall buyer psychology as well."

Excluding the GTA and Greater Vancouver, the average home price in July climbed 4.5 per cent nationally compared with a year earlier.

Sales activity may be beginning to bottom in the Greater Golden Horseshoe region, said Gregory Klump, chief economist at the Canadian Real Estate Association.

Residential sales in July compared with a year earlier fell 40.7 per cent in the GTA while dropping 28.2 per cent in the Niagara region and declining 23.6 per cent in Hamilton-Burlington.

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Christopher Alexander, regional director of Re/Max Integra's Ontario-Atlantic Canada region, said he considers the Greater Golden Horseshoe to be a healthy market now.

The supply of resale properties isn't as tight as before, with 2.6 months of inventory in July in the Greater Golden Horseshoe region, compared with 0.8 months in February and March.

"Buyers don't have to rush to make decisions. What we experienced in the first part of the year wasn't healthy," Mr. Alexander said from Mississauga.

The benchmark price of typical GTA properties sold in July hit $773,000, down 4.7 per cent from June but still up 18.1 per cent from the same month in 2016. "Further monthly declines – albeit more modest – are likely in the near term," Royal Bank of Canada senior economist Robert Hogue said in a research note. "Market psychology clearly has changed since April in the region. Gone is the earlier frenzy."

The benchmark residential price for Greater Vancouver reached $1.02-million in July, a 2.1-per-cent increase from June and up 8.7 per cent from July, 2016. Sales activity remains below the record levels in the spring of 2016.

"July statistics provided further evidence that the Vancouver-area market isn't on a path of overheating again," Mr. Hogue said.