Canada’s hot housing market is beginning to cool off, Scotiabank said Wednesday in a new report, with average home prices expected to decline by about 10 per cent over the next two to three years.

Scotiabank economists warn that the housing price correction will largely occur in the Toronto and Vancouver markets.

Senior Economist at Scotiabank Adrienne Warren said in a statement that in those markets, “supply risks and affordability pressures have the potential to trigger larger price adjustments.”

The report said record home prices combined with tighter home-buying rules are making home ownership less affordable for some would-be buyers, and are therefore dampening the housing market’s momentum despite record-low borrowing costs.

"Canada's housing market is expected to avoid the sharp downturn witnessed in the United States and Europe," Warren said."However, the downside risks to domestic housing activity are increasing.”

Warren said the slowdown’s impact “may not become fully visible until mid-decade."

The Scotiabank document follows reports issued early last month that found a real-estate slowdown in both Toronto and Vancouver.

The Greater Toronto Realtors Association said that the number of pre-owned homes that were sold in June was down 13 per cent from June of last year.

In the city of Toronto, 3,520 homes were sold in June 2012, at an average price of $554,077. In the same month in 2011, 4,053 homes were sold at an average price of $511,591.

Meanwhile, the Real Estate Board of Greater Vancouver said at the same time that detached home sales were down 37.4 per cent in June compared to the same month last year.

The board said there were 2,362 sales in June, down 27.6 per cent from the 3,262 sales in June 2011. June sales were also down significantly from those in May, when 2,853 homes were sold.

The market news comes on the heels of changes to mortgage rules that essentially made more Canadians ineligible to buy a home. The new regulations reduce the amortization period for government-insured mortgages to 25 years from 30 years.

Also, lenders can now issue home-equity loans for a maximum of 80 per cent of a property’s value.

The Scotiabank report says that the balance sheets of Canadian households remain in good shape, with real-estate equity sitting at an average of 67 per cent. However, Canadians are still carrying high personal debt loads, and with their balance sheets so heavily skewed to real estate, they are vulnerable to a sharp price correction.

The report points out that after the decade-long housing boom, pent-up demand has largely been exhausted and home ownership in Canada is now at record levels.

However some markets, especially Toronto and Vancouver, are in danger of over-supply, particularly the condominium markets in major urban centres.

The report notes that strong demand supports current high-rise projects. However, the ongoing high rate of condo construction combined with a projected higher rate of unsold units threatens a sharp price correction.

Last Thursday, Urbanation, which tracks Toronto’s high-rise market, warned of rising unsold condo units in a report of its own.

According to that report, unsold condo units in the city reached a high of 18,123 by the end of June. The report also said new unit sales were down 50 per cent from last year.

Earlier this month, the Toronto Real Estate Board said a dip in condo sales led an overall slide in the city’s real estate market.

The TREB report said home sales slipped by 1.5 per cent in July compared to the same month in 2011. However, the biggest decline was in the condominium market, where sales slid by 10 per cent in the same month.