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Correction coming in housing market

10% drop expected: Scotiabank

Canadian house prices are due for a 10 per cent correction -- and likely even more in overheated Toronto and Vancouver -- but will likely avoid a U.S.-style collapse, according to a Scotiabank report.

Economists from the bank said average Canadian house prices will likely experience a cumulative 10 per cent drop in the next two to three years as demand softens.

Toronto and Vancouver, where average prices are well above the national average, could suffer an even steeper decline as oversupply and affordability issues turn the cities into a buyer's market.

"Record prices combined with incremental regulatory tightening are reducing affordability and the housing market's earlier momentum," economists Aron Gampel, Adrienne Warren and Mary Webb report. "Pent-up demand has been effectively exhausted after a decade-long housing boom, with Canadian home ownership at record levels."

The housing market has been busy in the years since the 2008-2009 recession -- after the Bank of Canada moved to lower interest rates to ultra low levels to stimulate domestic spending. The fragility of the global economic recovery has pressured the central bank to keep rates at a stimulative one per cent.

Low lending rates have also encouraged many buyers to find a home before they rise, leading to bidding wars, higher home prices and warnings that some homeowners may find it difficult to service their debts when interest rates inevitably rise.

However, the Scotiabank economists don't believe Canada is at the same precipice the U.S. faced in 2007 prior to the subprime mortgage debacle, although they warn the "downside risks" are increasing.