Canadian house prices are due for a 10% 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 chartered bank said in a report Wednesday that 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.

The housing market has been particularly 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.

And 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.

The Scotiabank economists also single out Toronto and Vancouver as most vulnerable to a steep correction, noting that markets remain balanced and conditions favourable in most other markets.

In Toronto, ``a rising inventory, fuelled in part by strong investor demand, represents additional downside risk,'' they write.

The economists say the most likely outcome is that the housing market will adjust as it has in the past, when booms in the 1970s and 1980s were followed by flat or declining prices that lasted almost a decade.

However, they warn that there are risks of a sharper drop should the weak global economy impact job creation and investment in Canada.

(Canadian Press)