Credit rating agency DBRS said Thursday that average Canadian households can withstand a catastrophic drop in home prices, but warned that a rise in unemployment would be a greater concern.
The agency said a 40% drop in prices or rising interest rates would put pressure on Canadian households, but not have a large impact on mortgage defaults.
"However, a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations," DBRS said in a report.
"If unemployment spikes, many financially stretched households will be forced to sell their homes, putting greater downward pressure on house prices and turning many people into both house poor and cash poor."
The report comes amid continuing warnings from Bank of Canada governor Mark Carney and federal Finance Minister Jim Flaherty that higher interest rates are just a matter of time and Canadians need to ensure they don't get in over their heads with loans and mortgages.