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Majority of households would feel strain under higher mortgage rates: BMOMichael DeLeon/Getty Images/iStockphoto

Nearly three-quarters of Canadian households would feel a significant strain if they were to experience a modest increase in their monthly mortgage payments, a new survey by Bank of Montreal suggests.

BMO will release an inaugural report on housing confidence Tuesday, as policy makers, economists and the general public pay more and more attention to house prices and debt levels, with signs the real estate market could now be turning a corner after years of strong growth.

While the Bank of Canada is expected to leave interest rates at their current levels Tuesday morning, the market will be carefully parsing the words in its accompanying statement for signs of what's to come. Central bank Governor Mark Carney is in a tough spot: low rates are being blamed for sky-high consumer debt levels, largely in the form of mortgages, but raising rates could dampen economic growth at a time when trouble spots such as Europe are still a threat.

The BMO report suggests that Canadians still have strong buying intentions when it comes to housing, with 46 per cent of homeowners saying they intend to buy a property in the next five years. But the number who would buy in the next five years drops to 36 per cent if house prices were to rise by 5 per cent, showing the sensitivity of the market to prices at a time when many economists expect them to soften.

In contrast to economists' expectations for most regions of the country, the survey suggests that homeowners generally expect prices to rise by 2 per cent over the next year. Residents in the Greater Toronto Area were even more optimistic, even though that area is expected by forecasters to see one of the larger price declines. Vancouver residents were more likely to expect falling prices.

Meanwhile, about one-third of those surveyed have already cut back on big purchases and spending on entertainment, while one-quarter are reducing the amount they save in order to make their mortgage payments.

While nearly all of those surveyed said debt is a serious issue for Canada, only 19 per cent thought that it was a problem for them. Sixteen per cent said a 10 per cent increase in mortgage payments would leave them at risk of not being able to afford their home.

"Rising debt and elevated house prices have increased the vulnerability of a meaningful number of households, and their financial situation will worsen if interest rates increase even moderately," BMO senior economist Sal Guatieri stated. "With rates likely to remain low for some time, the recent tightening in mortgage rules will help to cool credit growth and the housing market."

The survey was conducted for BMO by Pollara, and done by way of online interviews with a random sample of 1,011 homeowners between Sept. 13 and Sept. 21.

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