11/17/2016 11:18 EST | Updated 11/17/2016 11:24 EST

Sudden Interest Rate Hike Could Tank House Prices 30%: CMHC

OTTAWA — 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.

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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 house for sale

A for sale sign displays a sold home in a development in Ottawa on July 6, 2015. (Photo: The Canadian Press/Sean Kilpatrick)

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.''

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