Canada's banking regulator said on Tuesday it will require the country's banks to test how they would withstand a 50 percent drop in property prices in Vancouver and a 40 percent decline in Toronto.
The move, which builds on an existing requirement that banks test their resilience to a 30 percent decline in home prices across all regions, is the latest in a series of measures by Canadian authorities to counter a risk posed by soaring house prices in the two Canadian cities.
The Office of the Superintendent of Financial Institutions (OSFI) said earlier this month it was tightening oversight of mortgage lending, citing concerns about record household debt and a sharp jump in prices.
Property markets have surged in Vancouver and Toronto since the 2007-2009 financial crisis, fueled in part by foreign investors, mostly from mainland China.
Canada's banking regulator does not publicly announce the results of bank stress tests in the same way as its counterparts in the United States and Europe, but it considers the tests important in ensuring the country's banks have strong enough capital buffers to withstand market shocks.
OSFI said that, previously, only the impact on banks' core capital ratios was assessed in the test but, this year, the impact on banks' leverage ratios, which do not take into account risk weightings used by banks, will also be tested.
Canadian Finance Minister Bill Morneau announced in June that the Liberal government would set up a working group of federal, provincial and municipal officials to recommend policy changes aimed at preventing a housing bubble.
British Columbia introduced a new 15 percent property transfer tax on foreign real estate buyers in Vancouver on Monday.
By Matt Scuffham