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You never want to be the last sucker in before a bubble bursts.

So be cautious, Toronto homebuyers. Don't be the donkey who "wins" the final bidding war of this long, impressive rally in prices.

One way or another, the rally's going to end. Sheer lack of affordability may kill it, or the federal government may taser it into submission with more restrictive rules on mortgage lending.

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We got a sense of the level of concern about housing on Monday, when a federal regulator proposed rules that would require banks to probe more deeply into the ability of their customers to carry a mortgage. Meanwhile, there's growing talk that Finance Minster Jim Flaherty will try to cool the market by making it harder to qualify for a mortgage. He's worried about high levels of consumer debt, and you can't buy into the housing market in Toronto and a few other cities these days without mortgaging yourself to the limit of endurance.

Slowly, a consensus is building that something needs to be done about the housing market. The Reuters news agency surveyed 14 economists on housing topics last month and 10 said yes when asked whether they believed tougher mortgage rules would be introduced by the federal government in the next 12 months. In a report issued last week, TD chief economist Craig Alexander warned about the risks posed by Canada's overvalued real estate market and said further government action would be prudent.

Another advocate of action to slow down the housing market is Louis Gagnon, a finance professor at Queen's School of Business. He thinks people are deluding themselves into thinking that house prices will keep going up.

"They anticipate that the market will be as good over the next 30 years as it has been in the past 30 years," he said. "This is a bad assumption and I think it's time to take measures to protect ourselves against downside."

Three possible measures have been discussed as ways to slow the housing market:

-Reduce the maximum amortization period back to 25 years from the 30-year option introduced back in 2006, along with a 35-year option that is now defunct.

-Raise the minimum down payment from the current 5 per cent;

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-Use tougher stress tests on new mortgage borrowers that would measure their ability to carry mortgages at the higher interest rates we'll see eventually.

Prof. Gagnon believes actions like these will stop what he calls "the overheating" in the market. But Gary Mauris, president of the mortgage brokerage firm Dominion Lending Centres, foresees a more drastic effect on the market from government action. "It's going to stall the market incredibly quickly," he said. "It's going to be like throwing a wet blanket over it."

The Toronto market may just cool off on its own. Royal Bank of Canada's latest data on housing affordability shows that mortgage payments, property taxes and utility costs for a standard two-storey home in the city were equal to 61 per cent of the median pre-tax household income at the end of 2011. Lenders typically draw the line at 40 per cent, while 30 to 35 per cent is a more realistic level for managing a home and other financial obligations.

Sure, Toronto is still affordable to well-off families. But are they numerous enough to keep the entire market stable? And then there's the question of whether the wealthy are too smart to throw money around in a market as dysfunctional as Toronto.

This is the city where a few weeks ago someone beat out 17 rivals for a non-descript three-bedroom bungalow by paying $1.2-million, $421,800 over the asking price. Bid high or go home. That's the Toronto way.

What keeps the housing market going despite endless warnings about how rising interest rates will make mortgages and other debt much more expensive? Prof. Gagnon of Queen's Business School comes back to the sense people have that no matter what they pay, the market will keep going higher. "It's the psychology of optimism," he said. "Try to go against that."

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Way back in 2000, at the height of the technology stock bubble, some poor slob of an investor paid $124.50 to buy shares of Nortel Networks. You can imagine what he was thinking: "Geez, that's expensive, but if I don't get in now I'll miss my chance to ride this rocket." We don't know the name of this investor, but his role in history is pivotal. He was the last sucker in before the bubble burst.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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