A severe and prolonged economic depression could result in a 25% decline in Canadian house prices by 2021, Canada's national housing agency says.

The estimate was included in a report on stress testing conducted by the Canada Mortgage & Housing Corporation and released publicly on Thursday. While the agency's base case scenario is for Canadian house prices to rise about 9.0% between 2017 and 2021, it said several extreme situations could result in price declines over the same period.

CMHC said those scenarios, which include a sudden rise in interest rates and a U.S.-style housing correction, should not be viewed as forecasts and aren't considered likely outcomes. It said the stress testing confirmed the agency's capital holdings are sufficient to deal with the most extreme scenarios.

CMHC is Canada's government-backed mortgage insurer and controls about half of the market.

The report comes less than a month after the agency warned it had found "strong evidence" of problematic conditions in the overall Canadian housing market. Rapid price growth in the major cities of Vancouver and Toronto has recently spread to other markets, CMHC said in October.

Much of the gain in Canadian house prices has been attributed to a prolonged period of low interest rates, which make borrowing more attractive. Policy makers have taken steps in recent years to cool some of the country's frothiest markets amid concerns about overheating and high debt levels.

The agency's stress tests also considered the impact of a sustained oil price shock, which it said could cause house prices to drop by 7.8% between 2017 and 2021. CMHC said it defined a sustained oil price shock as prices of $20 a barrel in 2017 and prices between $20 and $30 a barrel from 2018 to 2021.

An earthquake could lead to a 0.6% decline in house prices by 2021, while a sudden rise in interest rates could result in a 30% drop, CMHC said.

Write to Kim Mackrael at kim.mackrael@wsj.com

(END) Dow Jones Newswires

November 17, 2016 10:15 ET (15:15 GMT)

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