Canada's housing market is actually made of many regional markets, going through very different cycles. Most of the publicity is centred on the big cities and particularly in Vancouver and Toronto, where prices continue to rise to record levels.

Organizations ranging from the International Monetary Fund to the Bank of Canada have suggested the market is overvalued. The Economist magazine recently said it was "scarily overpriced."

But most economists in Canada think that fears of a housing crash are overstated and that a "soft landing" -- a gradual stabilizing of the market -- is more likely to happen.

"High prices and overvaluation will not cause a housing correction," says Helmut Pastrick, chief economist of Central 1 Credit Union in a recent commentary. "No housing recession in Canada or elsewhere has been caused by high prices alone -- something triggers the recession and consequent price decline."

He says some of the research that concludes prices are overvalued, including that by Canada Mortgage and Housing Corp. (CMHC), is inadequate. For example, it doesn't take into account that the supply of land in both cities is "nonexistent or very difficult to obtain," he says.

"Many conclude the high Vancouver and Toronto housing prices defy logic," he says. "Rising prices usually signal scarcity and in this case the scarcity is land. This variable is not adequately captured in CMHC's model and not at all in the price-income and price-rent ratio analysis."

Pastrick concludes, "The main housing market risk is not high prices or overvaluation but the risk of an economic recession. Risks are more important than vulnerabilities because risks trigger and expose vulnerabilities."

For example, he says, "an accurate forecast of oil prices would have foretold Calgary's housing downturn. Most if not all forecasters missed that one and they will not likely accurately predict the timing of the next economic recession either."

CMHC recently issued a report that said there was overvaluation in 11 of 15 real estate markets in Canada. In a recent speech in Toronto, CMHC president and CEO Evan Siddall said that high levels of household debt are a "key vulnerability to housing markets and financial stability" and that "although residential mortgage arrears rates remain low and credit scores are strong, household debt remains a vulnerability that would amplify an economic shock."

As Canada's largest provider of mortgage insurance, CMHC is also vulnerable. "Like other organizations, we have a formal, structured process to consider the potential impact of extreme events in our business. Stress testing is an essential part of our risk management program," said Siddall.

In determining worst-case scenarios for the housing market, he said, "Honestly, we considered wild, very unlikely ideas. The case of a zombie apocalypse had traction, briefly…."

CMHC crunched the numbers on a scenario where housing prices declined by 30 per cent and unemployment increased by five per cent.

"Sound familiar -- like maybe the 2008 U.S. housing market crash?"

He said this would result in insurance claim losses rising to $13.2 billion from $1.7 billion over five years. However, he said if this happened, CMHC's capital ratios would be well above its minimum capital target of 100 per cent, which is equivalent to minimum levels for the agency's private competitors as mandated by the Office of the Superintendent of Financial Institutions.

CMHC also considered three other disastrous possibilities:

• Global economic deflation persisting over five years,
• Another oil price shock, with $35 per barrel oil prices over five years and
• A magnitude 9.0 earthquake with its epicentre in Vancouver that also resulted in the failure of a major lender.

"None of them depletes our capital below our 100 per cent minimum capital level, the point at which we would stop underwriting new business," Siddall said.

Financially, the worst of the three scenarios would be sustained global deflation.

The federal housing agency also conducted an exercise around the premise that its mortgage loan insurance underwriting system was the target of a cyber attack.

Stress testing isn't an exercise that benefits just organizations -- it's smart for homeowners to have an emergency plan too.

For example, the Canadian Centre for Policy Alternatives says in a recent study that a 20 per cent decline in real estate prices would leave 169,000 families under 40 with more debts than assets.

Middle-aged families (in their 40s to 60s) would see their net worth fall, on average, by $70,000 to $80,000, resulting in a decline in net worth of 23 per cent, says the study.

Despite the dire warnings, the vast majority of economists see no economic disasters on the horizon and expect an orderly slowdown of housing price growth in Vancouver and Toronto. Mortgage interest rates are expected to start edging up in 2016 but no major increase is predicted anytime soon.