The downside risks to Canada’s housing market are increasing, says a Scotiabank report on Canadian Housing.

“Canada’s housing market is expected to avoid the sharp downturn witnessed in the United States and Europe,” says Adrienne Warren, senior economist at Scotiabank. “But, the downside risks to domestic housing activity are increasing. The impact of the slowdown may not become fully visible until mid-decade.”

Read: Canadian home prices will tumble

The report predicts record prices combined with incremental regulatory tightening are reducing affordability, as well as dampening the market’s earlier momentum.

Pent-up demand has been exhausted—after a decade-long housing boom—with Canadian home ownership at record levels. The global outlook has also become much more challenging.

“Average Canadian home prices will eventually decline a cumulative 10% over the next 2-3 years, as housing demand softens and buyers’ market conditions re-emerge for the first time in over a decade,” says Warren.

She adds, “The correction will be concentrated in Toronto and Vancouver, where supply risks and affordability pressures have the potential to trigger larger price adjustments.”

Canadian household balance sheets remain in reasonably good shape, with homeowners’ equity in real estate assets averaging 67%, compared with 41% in the United States.

Yet, high personal debt loads and balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, such as rising unemployment and interest rates.

Read: Canadians confident about housing

“The multi-year rise in home prices in Canada has pushed housing valuations to record levels, whether measured by the ratio of national house prices to household disposable income or by a house price-to-rent ratio,” notes Warren.

The report also says certain market segments are at risk of oversupply, including the expanding condominium markets in several of Canada’s largest cities. While current projects are supported by strong demand, the ongoing high level of construction underway raises the risk of sharper correction.