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Low borrowing costs and the desire for bigger properties during the pandemic have pushed home prices to record levels across the country.

Fred Lum/The Globe and Mail

The Governor of the Bank of Canada says there are signs of speculative behaviour in the country’s booming housing market and voiced concern over the pace of mortgage borrowing among highly indebted households.

Low borrowing costs and the desire for bigger properties during the pandemic have pushed home prices to record levels across the country, with smaller cities and suburbs seeing real estate values jump more than 30 per cent over the past year.

“While the resulting house-price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour,” Tiff Macklem said during a media conference call Wednesday to discuss the central bank’s scheduled monetary policy announcement.

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“Our concern ... is that against a background of rapid price increases, people will extrapolate. They will expect that those price increases will continue indefinitely and they will overstretch to buy houses. That would be a mistake,” he said.

With home prices and resales hitting record highs month after month and mortgage borrowing increasing at its highest level in years, federal policy makers have proposed incremental measures that could slow the market.

Want to cool the housing market? Force banks to shoulder more risk

Canadian housing starts soar 21.6 per cent on month in March

Mr. Macklem said he supported the Canadian bank regulator’s plan to make it harder for borrowers to qualify for a mortgage, as well as Ottawa’s proposal to slap a 1-per-cent tax on vacant homes owned by foreigners.

The proposal from the Office of the Superintendent of Financial Institutions would effectively require borrowers to prove they can make their mortgage payments at an interest rate of 5.25 per cent, up from 4.79 per cent. (This would only apply to uninsured mortgages, or those where the borrower has put a minimum down payment of 20 per cent on the purchase price of the house.)

“When interest rates are unusually low, there is greater potential for them to eventually rise. And so by putting in this minimum, that will help protect borrowers and lenders from overstretching,” Mr. Macklem said.

In its Wednesday announcement, the Bank of Canada kept the benchmark interest rate at 0.25 per cent but said a potential rate hike could occur in the latter half of 2022 instead of 2023. The idea that the key interest rate would remain near zero until 2023 has given home buyers more confidence to borrow.

Mr. Macklem defended the bank’s decision to keep interest rates low, saying the bank needs to look at the whole economy, where employment is still well below prepandemic days. “Right now, the economy needs our support,” he said.

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In February, Mr. Macklem said the housing market was showing early signs of “excess exuberance,” though he also said it was not as hot as it was in Ontario and British Columbia in 2016 and 2017, when home prices in Vancouver and Toronto were rapidly increasing.

Now, home prices across the country are accelerating at the fastest pace on record and inventories are at their lowest level, according to Canadian Real Estate Association data.

Earlier in April, Bank of Canada staff issued a special housing-market report that examined vulnerabilities and showed that highly indebted households were borrowing at a faster pace.

“When you see people taking out bigger loans relative to their income, you worry that they might be overstretching,” Mr. Macklem said on Wednesday.

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