07/26/2016 05:09 EDT | Updated 07/26/2016 05:59 EDT

Vancouver, Toronto Housing Crash Potential Has Regulator Requiring Banks To Prepare

This is how real the prospect of a crash really is.

OTTAWA — Canada's banking regulator is requiring banks to conduct stress tests to determine how they would deal with a 50 per cent downturn in Vancouver real estate prices and a 40 per cent cut in Toronto home prices.

The key changes announced Tuesday by the Office of the Superintendent of Financial Institutions Canada come on the heels of a letter it sent earlier this month to all federally-regulated financial institutions reminding them to exercise prudence when underwriting home mortgages.

Condo properties under construction in Toronto. (Photo: CP)

The regulator identified several areas that it said it will be watching closely, including the verification of a borrower's income, debt service ratios and the reliability of property appraisals.

Last month, the Bank of Canada raised concerns about the housing market and noted that vulnerabilities due to the continued rise of household debt and greater imbalances in regional housing markets were higher than they were six months ago.

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