UPDATE 1-Toronto May home sales drop as listings surge, price gains slow

(Adds comment from real estate broker, economist)

OTTAWA, June 5 (Reuters) - Toronto's red-hot housing market cooled in May as sellers cashed in on high prices while buyers moved to the sidelines in the wake of new housing rules aimed at dampening real estate demand in Canada's largest city, data showed on Monday.

Average home price rose 14.9 percent in May from a year earlier, well below the pace of gains seen in recent months, while new listings jumped 48.9 percent and sales fell 20.3 percent, the Toronto Real Estate Board said.

The sharp shift in the Toronto market comes after a 15 percent tax on property purchases by foreign buyers was introduced in April as part of 16 measures designed to cool the market due to fears of a bubble.

Real estate brokers and economists alike hailed the softening as just what the market needed.

"It had gotten kind of scary," Dianne Usher, senior vice president of Johnston and Daniel, a division of Royal Lepage real estate group, told Reuters.

Usher said the slowdown had already begun before the new housing rules, and she believes the market will bounce back.

"It's just a pause, people taking time to make better decisions - and that's not a bad thing," Usher said, adding that the surge in new listings is, in part, distorted by surprised sellers re-listing homes after an initial listing did not fetch the price they had expected.

The slowdown in sales in May is similar to the pullback seen in Vancouver after a foreign buyers' tax was imposed in 2016, said Benjamin Tal, senior economist at CIBC Capital Markets.

"We have little doubt that the next few months will see the Toronto market continuing to soften, and prices will face additional downward pressure," Tal said in a research note.

"We view that trajectory as a very positive development, but given the lack of external shock as a trigger, we believe that this adjustment will be relatively short-lived, not unlike the situation in Vancouver where activity is already rebounding," he added.

The real estate board said the surge in new listings may reflect profit-taking by sellers.

"The increase in active listings suggests that homeowners, after a protracted delay, are starting to react to the strong price growth we've experienced over the past year by listing their home for sale to take advantage of these equity gains," Jason Mercer, TREB's Director of Market Analysis said in a statement. (Reporting by Andrea Hopkins; Editing by James Dalgleish and W Simon)