Kerry Jones spent weeks this spring urgently searching for a house to buy on the west side of Toronto, fearing that if she and her husband didn't move quickly they would end up priced out of the city's soaring market.

But after watching the Greater Toronto Area market cool this spring and, after visiting a growing assortment of houses that are better and cheaper than those available a month ago, the couple no longer feels the same pressure to make a choice.

"Our plan was to have a house bought by the end of the summer, and now we're really not so sure," she says. "We don't feel like we're in as much of a rush any more. ... We feel more confident that if we wait two or three months, we might get a better deal than we could right now."

Story continues below advertisement

Ms. Jones and her husband, Maher El-Abdallah, are joining thousands of other potential home buyers in the GTA who are moving en masse to the sidelines, delaying their purchase decisions as they watch the city's housing market slow rapidly. The result is that home sales are plunging in the Toronto region after years of soaring markets.

Data compiled by the Toronto Real Estate Board shows the number of homes sold in the GTA fell 50 per cent in the first two weeks of June compared to the same period last year. The slowdown comes on the heels of a 20-per-cent drop in sales in May compared to May last year.

Prices also fell in the first half of June to an average of $808,847, down 6.4 per cent from the May average price of $863,910 and a decline of 12.2 per cent from April's record-high average of $920,791 for all types of homes in the GTA. (Home prices are still up 6.7 per cent compared to the first half of June last year, however, so the recent declines have not erased all of the past year's run-up.)

The drop began in earnest after the Ontario government introduced new regulations in April to cool the housing market in the Toronto region, including a new 15 per cent foreign buyer's tax.

Ontario Premier Kathleen Wynne said it would be a "pretty good outcome" if the overheated Toronto market took a pause because of the new housing measures her government introduced.

"It's a bit cooler," Ms. Wynne said in a recent interview. "But I think the jury is out yet. I don't think we know at this point exactly what the forces are. We're monitoring it with the experts and the associations to see what is happening. It's entirely possible that there is some cooling effect because of the announcements that we made and people know now what's coming, but it could be other forces. It's just too soon to say."

But as the downturn accelerates more rapidly than many anticipated, the question confronting policy makers is whether the province may have over-shot with its measures, and whether Toronto's housing market is on the cusp of a significant market correction or is merely taking a breather to regroup.

Story continues below advertisement

Most experts side with the taking-a-breather theory, arguing all those who were frantically bidding two months ago have not abandoned their dreams of home ownership and will be back when they see the market stabilizing.

"I think there's a ton of pent-up demand still out there," says Kevin Somers, chief operating officer of Royal LePage Real Estate Services Ltd. "It's just reconciling itself to a comfort level around whatever the new reality happens to be."

Jacob Asparian, a broker at Keller Williams Energy Real Estate in Oshawa, says he doesn't blame his clients for taking a break to reassess, especially those exhausted by the market frenzy earlier in the spring.

He believes they will return soon, however, and Toronto will not see a long-term decline.

"I have tons of clients right now who have said, 'You know what, I'm going to wait until the fall,'" he says. "Right now, they don't feel comfortable with where the market is at, and I agree with them."

CIBC World Markets economist Benjamin Tal argues the weakness in the market is "a temporary story" because economic fundamentals are still unchanged, with interest rates low and Ontario's economy still growing strongly.

Story continues below advertisement

Mr. Tal says he would not be surprised to see prices drop 10 per cent or 15 per cent from their high, but that would not even reverse the gains from the past year. "To me, this [downturn] is exactly what the market needs."

The difficulty in predicting the market's direction is that the recent drop has been triggered as much by a widespread mood that Toronto's bubble is bursting as by any economic fundamentals, and psychology can be difficult to sway.

"It's sort of a confidence effect, and anything can burst bubbles," says economist David Madani of Capital Economics. "You don't need higher interest rates or a typical macroeconomic catalyst."

Mr. Madani has one of the more dire forecasts for Toronto's market, predicting the city is in for a long, slow correction with prices falling 20 per cent to 40 per cent over the next five years.

He says house prices have risen far more quickly than incomes, making the growth unsustainable. He also believes a series of federal and provincial reforms – including tougher mortgage rules – are driving more first-time buyers out of the market.

"All bubbles burst," he warns. "There's no bubble in history that hasn't burst."

Story continues below advertisement

Not everyone is convinced the market is still in a bubble, however. Some argue Toronto is not overpriced when compared to other major global cities, and there is no sign that core demand for housing is going to change.

Realtor Adam Brind, managing partner at Core Assets Real Estate in Toronto's downtown core, says he is confident house prices will not fall by 40 per cent in coming years given the city's strong growth.

"It's just not going to happen. If it does, we've got much bigger problems because there is something else happening in the world that would cause that," he says.

Mr. Brind says Warren Buffett's agreement to invest in Home Capital Group Inc. this week could also be a factor to help restore confidence that the housing market is fundamentally sound.

"Just like the stock market, all of a sudden there's a perception issue or something happens and all the bank stocks fall by 10 per cent or 15 per cent, and they all bounce back a month later. I think that's exactly what's happening now."

But John Pasalis, president of Realosophy Realty Inc. in Toronto, predicts it may take until January to see the market turn. He believes there could be a surge of new listings in September as people decide to sell their existing homes before shopping for a new one in an uncertain market, leaving the market with more sellers than buyers.

Story continues below advertisement

"Everyone is going to list their homes in September, and then no one is going to move to buy until they've sold," he says.

Real estate experts also don't exclude the possibility that the market may rebound almost immediately, even before the September.

In the first two weeks of June, the number of new listings across the GTA rose 22 per cent compared to the same period last year. But compared to April and May this year, when new listings grew by 34 per cent and 49 per cent respectively, the pace of listing growth in June has fallen significantly, which could mean the flood of new supply may already be slowing.

Mr. Brind has recently seen the number of showings pick up a bit on listings managed by his firm, and hopes it is a sign that more brave shoppers are already out looking for a deal.

For her part, Ms. Jones has no plans to stay out of the market for long. She and Mr. El-Abdallah got married in March, started looking for a house immediately afterward and are encouraged by the recent change in atmosphere.

One listing agent at a recent open house even volunteered that there was room for negotiation in the listing price, which was the first time she had heard such an offer.

Story continues below advertisement

"We feel a lot better about buying a house," she says.

– With a file from Justin Giovanetti