* Banks could lose C$18 billion in downturn -Moody's
* RBC would face biggest loss; CIBC's capital most at risk
TORONTO, June 20 (Reuters) - Canada's biggest banks could absorb the direct effects of a severe housing crisis without incurring catastrophic losses, ratings agency Moody's said on Monday, as policymakers debate whether the country's property markets are in bubble territory.
Canada's housing market boomed after the financial crisis, fueled by record low borrowing costs and further boosted by foreign buying.
Earlier this month, the Bank of Canada warned that the rapid pace of home price increases in Toronto and Vancouver is unlikely to continue, with growing potential for a downturn.
Moody's said it stress-tested Canada's biggest banks against a 25 percent drop in house prices and an additional 10 percent decline in the provinces of Ontario and British Columbia, which have experienced significant price rises in recent years.
The ratings agency found that while Canada's banks could lose almost C$18 billion ($14 billion) under that scenario, they would be able to generate enough capital to cover their losses within a few quarters.
While Royal Bank of Canada would suffer the largest loss under the scenario, Moody's said, Canadian Imperial Bank of Commerce's capital would be most at risk given its focus on lending to Canadian households.
The ratings agency said the negative effects of a housing downturn in Canada are reduced when compared with those of the United States because many mortgages are backstopped by the federal government, there is less sub-prime lending and securitization practices that helped fuel the 2007-09 financial crisis are less prevalent.
"Canadian policymakers have made significant structural changes to the market - some informed by the U.S. example - that would help contain the effects that a severe housing shock could have on the country's banks," said Moody's Assistant Vice President Jason Mercer.
Moody's said half of Canada's outstanding mortgage debt - nearly C$700 billion in residential mortgage loans - is explicitly supported by the Canadian government.
Earlier in June, a report from the OECD recommended that Canadian housing regulations be tightened further and regionally targeted to help cool real estate markets that are booming in some major cities.
Canadian governments have already tightened mortgage regulations five times since 2008 to cool the boom.
$1 = 1.2793 Canadian dollars Reporting by Matt Scuffham; Editing by Steve Orlofsky