Sudden rise in interest rates could cause home prices to drop 30 per cent: CMHC

Canada's federal housing agency says a sudden rise in interest rates could cause house prices to plummet 30 per cent, according to a stress test it conducted.

Canada Mortgage and Housing Corp. says it could withstand such a scenario, but its mortgage insurance business would incur $1.13 billion in losses.

CMHC tested its mortgage loan insurance and securitization businesses against several extreme scenarios, including a U.S.-style housing correction, a high-magnitude earthquake that destroys critical infrastructure and a prolonged plunge in oil prices of between US$20 to $30 per barrel. The agency published the results of these tests but noted that none of the scenarios should be considered a prediction or a forecast.

CMHC says that in the event of a "severe and prolonged" economic depression, house prices could drop 25 per cent, unemployment could rise to 13.5 per cent and the insurer could incur $3.12 billion in losses. CMHC says the tests confirm that its capital holdings are sufficient.

"Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them," said Romy Bowers, CMHC's chief risk officer, in a statement. "Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios."