OTTAWA, Feb 16 (Reuters) - Fitch Ratings on Thursday forecast a slowdown in growth of Canadian home prices this year, and it warned that the risk has risen of a correction in overvalued markets like Toronto and Vancouver.
With household debt compared to income sitting at a record high, recent tighter mortgage lending rules from the government should help mitigate the run-up in home prices, improving affordability, it said.
Prices will rise by just 3 percent this year, Fitch said, substantially lower than the 12 percent gain it estimates the market saw in 2016. Price growth this year is expected to lag that of the United States, with prices south of the border expected to rise by 4 percent.
The Canadian housing market has been robust in the years since the global financial crisis, supported by low interest rates.
However, the recent sharp acceleration in Vancouver and Toronto home prices has raised worries of a bubble in those cities.
Vancouver prices began to pull back from their peak last year as the provincial government imposed a tax on foreign buyers in the city, though Toronto has continued to rise, industry data shows.
Fitch did not specify what price fall would constitute a correction.
Despite the expected slowdown in home price growth across Canada, Fitch said the number of delinquencies should remain low, as long as unemployment does not rise.
While borrowers could also be hurt by higher interest rates, given the high level of debt they are carrying, Fitch said the risk of a sharp rise in interest rates is remote.
Overall, the number of mortgages that are 90 days or more behind is expected to hold steady at 0.3 percent in 2017.
The Bank of Canada cut interest rates twice in 2015 as the economy was hit by the oil price crash and is expected to hold rates where they are into 2018.
Reporting by Leah Schnurr, Editing by W Simon