As Canada’s big banks prepare to report their third-quarter earnings in two weeks, National Bank Financial says its outlook for the banking sector depends on the sustainability of surging property prices in the country’s hottest housing markets.

The report, sent to clients Monday, warned that a shock to the housing market may impact household asset classes outside of real estate secured lending and “could quickly infect the broader Canadian economy.”

“We believe falling home prices would trigger a spike in loan losses, not from residential mortgage lending, but rather from unsecured household debt and household loans secured by other collateral,” the report stated. '

Peter Routledge, financial services analyst at National Bank Financial and a co-author of the report, told BNN that if homes start losing value, consumer confidence will go down, which could ultimately have a negative impact on the economy.

“As home prices start to fall, people get a little bit more conservative – they stop spending. When they stop spending, the economy starts to shrink,” he said in an interview, alluding to similar experiences in the United States. “And then you get some employment problems from that.”

In its report, National Bank Financial argued "the immediate risk of a housing correction remains confined to Vancouver” but Routledge said that B.C.’s 15 per cent foreign buyer tax could redirect foreign capital to Toronto.

“What could happen is some of the foreign money that was going into Vancouver […] could come over and actually fuel house price appreciation in Toronto,” he said.

The week before the foreign buyer tax was implemented, there were reports of a surge in the number of deals being closed in the Vancouver area, which Routledge says is an indication that there could be far less activity now that the tax is in effect.

In terms of specific banks that may be vulnerable to changes in Vancouver’s real estate market, Routledge said that CIBC is most at risk.

“It’s not because they lend disproportionally more to folks in Vancouver, it’s because they have a very, very large personal commercial banking operation relative to the total bank,” he said.

Bank of Montreal launches reporting season for Canada’s big banks on Aug. 23.