OTTAWA - 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 per cent 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.

DBRS said that faster debt accumulation relative to the economy as a whole or average household income have driven up both home prices and borrowing.

The result has been reduced housing affordability, with pressure on day-to-day cash flow for average Canadian households, leaving them little room to deal with unexpected expenses.

"Canadian households are solvent, possessing ample home equity and other financial assets," DBRS said.

"However, day-to-day cash flow appears to be stretched, making households vulnerable to cash flow shock and credit problems from the occurrence of any of the three 'Ds' — disability, divorce and dismissal."

Household debt in Canada reached record levels of more than 150 per cent of disposable income last year, close to the 160 per cent mark that preceded the housing collapse in the United States.

Carney has warned that record high household debt is the number one domestic risk to the economy, while Flaherty has tightened mortgage lending rules three times in recent years, including reducing the maximum amortization period and hiking the minimum down payment.

Canada Mortgage and Housing Corp. and the Office of the Superintendent of Financial Institutions have also tweaked the system and may be preparing to do more.

WHAT $350,000 WILL GET YOU IN THESE CANADIAN MARKETS
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  • St. John's, Nfld. -- $125 Per Square Foot

    This four-bedroom, two-bathroom custom-built bungalow in St. John's West End neighbourhood boasts hardwood floors, a covered sundeck and an oversized yard. With an asking price of $349,900 and 2,750 square feet of livable space, this spacious home costs approximately $125 per square foot.

  • Trois Rivieres, Que. -- $127 Per Square Foot

    This five-bedroom, two-and-a-half bathroom house features a double-width garage and a heated inground pool. At approximately 2,750 square feet and an asking price of $349,900, it works out to around $127 per square foot.

  • Winnipeg -- $160 Per Square Foot

    This spacious split-level home in southeast Winnipeg features four bedrooms and three baths, a stone fireplace and a jazuzzi in the master bedroom. It sits on a 142-foot-long, pie-shaped lot. At 2,182 square feet and a $349,900 asking price, it works out to around $160 per square foot. <strong>CORRECTION:</strong> <em>An earlier version of this slide incorrectly listed the price-per-square foot as $600</em>.

  • Red Deer, Alta. -- $248 Per Square Foot

    This five-bedroom, three-bath home features vaulted ceilings, a fireplace and a massive walk-in closet in the master bedroom. At 1,408 square feet -- this average-sized house on the prairie works out to $248 per square foot.

  • Montreal -- $250 Per Square Foot

    This two-story townhouse condo just east of downtown Montreal features three bedrooms and two baths, cherry wood floors and a terrace. At 1,400 square feet and an asking price of $349,000, this condo works out to $250 per square foot.

  • Burlington, Ont. -- $388 Per Square Foot

    This cozy bungalow on the edges of the Greater Toronto Area features four bedrooms, two baths and a long, 175-foot lot. Highlights include a granite countertop and newly finished hardwood floors. At a snug 900 square feet, this house is going for $388 per square foot.

  • Toronto -- $499 Per Square Foot

    This one-bedroom, one-bath condo in Toronto's Entertainment District features a balcony with a southeast exposure. In a sure sign the condo is outfitted with just the basics, the unit's sellers boast of its "brand name appliances" and "frost free refrigerator." At 700 square feet (including the balcony), it works out to $499 per square foot.

  • Vancouver -- $688 Per Square Foot

    This one-bedroom, one-bathroom corner unit in Vancouver's Kitsilano neighbourhood "shows much larger than the square footage," the realtor boasts. That's good, because at 508 square feet, this place is only slightly larger than some of the bedrooms and living rooms available in similarly-priced houses in other markets. The condo boasts "gorgeous mountain views," but it'll cost you -- $688 per square foot.

HOMES ABOVE $1 MILLION IN THREE CANADIAN CITIES