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The Bank of Canada building in Ottawa on April 15, 2020.

Adrian Wyld/The Canadian Press

“Expectations becoming extrapolative.”

The Bank of Canada isn’t known for poetic flourishes but, in its description of the mania at the heart of Canada’s housing market, there’s a delightful cadence, appealing alliteration and a lot of truth.

In plain terms: Prices are soaring, in part because buyers believe they will keep on soaring. People are assuming a future of higher prices, by extrapolating from a present where prices are rising rapidly.

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These assumptions are a very human tendency. But they’re also dangerous, because extrapolated expectations eventually hit a wall. The central bank, in its annual financial system review released last week, cited “imbalances in the housing market” as one of six key vulnerabilities. It also worried about “many households” now shouldering large mortgages. In the event of a job loss or other shock, their debt burdens could quickly become unaffordable.

The Bank is just the latest institution to worry about the direction of Canada’s housing market. Yet for all the concerns, there isn’t much any of this country’s policy makers are willing to do about it.

To reiterate the obvious, the market has gone bonkers. More homes were sold in March than any month ever before, and while things slowed slightly in April, it was still the busiest April ever. Meanwhile, prices keep climbing. According to the Canadian Real Estate Association, its April national home price index was 23.1 per cent higher than a year earlier. The pace of gains has gone supernova and is now far higher than previous surges in 2006-07 and 2016-17.

The federal Liberals, eyeing an election and fearful of hard choices that might upset homeowners, have been timid. Provincial governments are behaving likewise. Municipalities, too. This despite the urgings of numerous economists. Bank of Montreal economists in late March called on policy makers “to act immediately” to break a “market psychology … that prices will only rise further.”

The one entity that has the firepower to quell the storm is the Bank of Canada. But with unemployment at 8.1 per cent and the country still in the grip of the pandemic, the central bank is not about to raise interest rates. It cannot, should not and will not kneecap the economy in an attempt to slow housing prices.

Which leaves Bank of Canada Governor Tiff Macklem issuing stern warnings to buyers to be careful.

“Some people may be thinking that the kind of price increases we have seen recently will continue,” Mr. Macklem said last Thursday. “That would be a mistake.”

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“Don’t extrapolate from the current rapid increases we have seen in prices. Don’t expect that those will continue indefinitely.”

It’s good that Mr. Macklem is sounding an alarm, even if he isn’t the one who can put out the fire. The people with the tools are Canada’s elected officials.

Added to the list of worries is the possibility that the current housing-price surge – having been allowed to run unbridled – is permanently changing the complexion of Canada’s housing market. In cities such as Toronto and Vancouver, it’s been a long time since housing was inexpensive. But it’s now become so costly that, absent the help of deep-pocketed parents, even young people with high incomes and solid savings find it difficult, if not impossible, to afford to buy. And if they’re struggling, what about everyone else?

Something has gone seriously wrong with Canada’s housing market. This year’s price surge is the result of years of decisions and indecision, from politicians at all levels, municipal included. The building of housing in Canada is too restricted in too many neighbourhoods, with zoning effectively designed to freeze the number and size of existing buildings, thereby preventing the addition of more homes. Meanwhile, at the provincial and federal levels, governments for years largely ignored housing.

If too many people can’t afford to live in the country’s big cities, where the economy’s energy is greatest, that will hurt Canada’s prospects. It would also be something of a betrayal of this country’s young people. Generations of middle-class Canadians, through concerted savings and hard work, were able to buy a place to live. That equation is threatened.

Mr. Macklem’s urging of caution is wise. But fixing this is going to take more than words of warning.

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