The IMF says average national home prices are 10 to 15 per cent above where the fundamentals suggest they should be. (CBC)

Rising household debt and high housing prices are making Canada more vulnerable to global economic shocks, the International Monetary Fund says in its annual look at the country's economy.

Despite evidence of over-building in some markets — especially in Ontario and Quebec — and average prices that it says are, on average, 10 to 15 per cent above where the fundamentals suggest they should be, the IMF pegs the likelihood of a sharp fall in house prices as "low."

The report notes that house price growth and residential investment have already shown signs of moderating.

"While high household debt and still elevated house prices leave Canada more vulnerable to external shocks, a less gradual unwinding of domestic imbalances than in staff forecasts could also lead to lower growth," the IMF said.

"Private consumption and residential investment are expected to contribute less to growth than in the recent past," the report said.

Praise for mortgage rule tightening

While IMF staff praised the federal government for the measures it has already taken to tighten mortgage lending rules, it said Ottawa would need to do more should household debt levels continue to rise.

"Higher down payment requirements, lower caps on debt-service -to-income ratios, and tighter [loan-to-value] ratios on refinancing are some of the possible options," it says.

The IMF also noted that Canada’s banking system is sound, saying it is "well capitalized, profitable, and continues to show low non-performing loans."

As far as interest rates go, the IMF recommends that the Bank of Canada not increase rates until signs of growth improve — likely later this year.

The IMF projects that real GDP will grow by just 1.8 per cent in 2013, but should improve to 2.3 per cent in 2014, 2.4 per cent in 2015, and 2.5 per cent in 2016.