Canada’s housing market risks entering a speculative phase that could trigger new measures from regulators, economists at the nation’s largest banks are warning.

For months, historically low mortgage rates have combined with increased demand for bigger living spaces and a lack of supply lifting prices to new highs. Recently, signs have begun to emerge of speculators driving some of the demand, along with other buyers worried they’ll miss out from the boom. That’s raised worries prices could be moving up by too much and too fast.

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“It’s possible given the recent increases in prices, that some people are speculating about further increases in prices,” Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by phone. “That was missing in the market until now.”

In Toronto, the average price of a home sold in February breached the $1 million mark for the first time, after a 15 per cent increase over the past year. Gains have also been broad-based, with most cities and towns including Montreal and Ottawa reporting double-digit increases. Combined with sluggish listings, the surge in demand has left Canada with only 1.9 months worth of housing inventory available -- the lowest reading for this measure of home supply on record.

Rising prices “often invite heightened speculative activity, which adds more fuel to already hot markets,” Robert Hogue, an economist at Royal Bank of Canada, said Thursday in a report to investors.

‘Excess Exuberance’

For policy makers, the rally raises a myriad of concerns -- from affordability for young and poor families to concerns over a correction. At the same time, officials are reluctant to hold back a crucial sector at a time when the economy is still struggling to recover from the COVID-19 pandemic.

At a press conference last week, Bank of Canada Governor Tiff Macklem said he didn’t think it was the right time to tighten rules, even though he is seeing early signs of “excess exuberance.”

“The economy is weak, we are just coming out of the second wave, we need the growth we can get,” Macklem said told reporters on Feb. 23. “I think we need to watch things very closely but I’m not recommending new measures right now.”

Prime Minister Justin Trudeau’s government said three months ago it planned a foreign buyers tax this year, but has also stoked demand through other means such as support for first-time home buyers. The last major tightening of regulations came in 2018, and pressure may be growing for Trudeau to move again as soon as the spring budget, due in coming weeks.

“Be on guard for macroprudential measures,” Derek Holt, an economist at Bank of Nova Scotia, said Wednesday in a report to investors. “Ottawa has been caught completely off-guard in the magnitude of the housing response to very low financing costs.”

Options could include a flipper’s tax -- paid by people who sell houses quickly after purchase -- or changes to mortgage qualification rules, according to Tal.

Or, the market could simply cool off naturally as prices become more unsustainable and mortgage rates begin to rise.

“Moderation still appears to be in the cards later this year,” Rishi Sondhi, an economist at Toronto Dominion Bank, said in a report published Wednesday.

Even a talking down of the market could suffice, according to one broker.

“The first and most effective thing policy makers can do is to stop telling Canadians there’s nothing to worry about when it comes to our housing market,” John Pasalis, president of Toronto-based Realosophy Realty, said by email. If “Ottawa is concerned about the rapid acceleration in prices and if the market doesn’t cool down naturally, they’ll introduce policies that aim to cool the market.”

Trudeau’s government is closely monitoring the health and stability of the housing market, Jessica Eritou, a spokeswoman for Finance Minister Chrystia Freeland, said by email. She declined to comment on any budget measures.