A new report from RBC indicates that a "historic" housing correction is now underway in Canada and that the most expensive markets in Ontario and British Columbia are likely to be the "epicenter" of the upcoming contraction.

Housing prices in the Greater Toronto Area rose by nearly 36 percent year-over-year in February during the pandemic.

However, Bank of Canada's strong interest rate hikes have since impacted the market, which has now seen four consecutive months of price declines.

RBC Bank said in its report, released last week, that it now expects the average home prices across Canada to drop by about 12 percent from the February peak by early 2023.

It says that if this indeed happens, it "would rank as the steepest correction during the past five economic downturn periods."

However, the bank says the correction will happen differently depending on your market.

Explaining that housing could be "more resilient" in markets that are already relatively affordable, where prices are expected to fall only about three percent in Alberta and Saskatchewan and between five and eight percent in most other provinces.

But the bank warns that buyers in high-priced markets like Ontario and British Columbia "will be particularly sensitive to interest rates" and may find themselves marginalised in larger numbers.

This, in turn, could lead to a more significant correction in those markets.

The bank explained in its report, "Our forecasts point to cumulative declines in home resales in British Columbia and Ontario of 45 percent and 38 percent respectively in 2022 and 2023, paving the way for home price index drops exceeding 14 percent from the quarterly peak to the trough in both provinces."

The bank said in its report, "The magnitude of the contraction will rival that of the early 1990s in Ontario (when resales fell 41 percent and prices 15 percent) although it is much less severe than the early 1980s episode in British Columbia (when resales plunged 62 percent and prices 27 percent)."

On another note, Bank of Canada raised its key lending rate from 0.25 percent to 2.5 percent over the past months in an attempt to curb inflation and warned that further increases will likely be necessary.

RBC said in its report it now expects the interest rate to reach 3.25 percent by October.

This, along with the high mortgage stress test qualifying rates, will "impede extended waiting buyers in every region of the country," and will ultimately lead to a "material correction," the bank says.

However, Robert Hogue, the chief economist at RBC in the report, points out that the bank does not expect a "crash" in home prices at this stage.

He said, "We argue that the ongoing contraction should be viewed as a welcome slowdown after two years of craziness that placed a heavy financial burden on many new homeowners and made ownership dreams more difficult."

Adding, "While a more severe or prolonged recession cannot be ruled out, we expect the correction to end sometime in the first half of 2023 – lasting about a year – with some markets likely stabilising faster than others."

Strong demographic fundamentals (including rising immigration) and a low probability of overbuilding should also prevent the market from entering a death spiral."

The latest data from the Toronto Real Estate Board indicated that sales dropped 41 percent year-over-year in June while the average home price remained 5 percent higher than the previous June at $1,146,254.