An influential ratings service has released a report that identifies Canada as one of four Aaa-rated countries that are exposed to a potential housing market correction.
In addition to Canada, the report by Moody's Investors Service lists New Zealand, Sweden and Australia as countries that have seen the largest increases in home prices and household debt among advanced economies over the last three years.
Moody's says a housing downturn could involve material spillovers to the broader economy for Canada and New Zealand, where residential construction accounts for approximately 7.5% of gross domestic product in both countries.
However, Moody's says that unless reversals in house prices are accompanied by other long-lasting negative shocks, they would not fundamentally undermine the sovereigns' credit profiles.
The agency says all four countries have strong banking systems with high capitalization levels, conservative business models and strong liquidity.
The housing sector has been identified as a risk for the Canadian economy as housing prices have marched higher, fueled by low interest rates.
