(Bloomberg) -- Canada’s housing agency raised its risk assessment for the Toronto market to high, while also warning of overheating at the national level as the pandemic-driven surge in home prices shows no signs of slowing.

The Canada Mortgage and Housing Corp. now rates five of the country’s major markets as having a “high degree of vulnerability” to a sharp correction in prices, with Ottawa and Halifax joining the smaller centers of Hamilton and Moncton in the category.

Across the country, 76% of homes brought to market in the three months through December were sold in the same period, a threshold that indicates overheating nationally, according to the agency’s Housing Market Assessment, released Wednesday.

“What we’re trying to do here is identify the kind of vulnerabilities that could be the precursors to market corrections or house-price corrections,” Bob Dugan, chief economist at the CMHC said in a conference call with reporters. “Those are the kind of conditions that could lead to downward pressure on house prices, or a downward correction on house prices.”

The combination of rock-bottom mortgage rates and the pandemic-induced desire for bigger living spaces has pushed Canada’s housing market to record levels over the past year. Smaller cities and suburbs have posted the biggest gains as the rise of remote work liberated buyers to look farther afield from where their employers are based.

Policy makers are being urged to take action to cool the market, as the continued run-up in prices threatens to exacerbate the gulf between the rich and the poor and may sow the seeds for a destabilizing drop in values later.

Toronto Gains

In Toronto, Canada’s biggest city, the CMHC’s increased risk assessment was driven by an acceleration of price growth, with ground-level homes and suburban parts of the metropolitan area leading the way, according to the report. Excess inventory in the rental market, due in part to a near halt to immigration during the pandemic, also contributed.

Outside Toronto, the four cities with the highest risk assessments -- such as Hamilton, or scenic and more affordable Ottawa or Halifax -- have been top destinations for those willing to move as far as necessary to find a bigger home or a better quality of life.

But the trend’s biggest impact has been on much smaller communities, including Tilsonburg or Woodstock in Ontario, each with 35% annual price gains through February. Dugan cautioned that the CMHC doesn’t conduct separate risk assessments for those areas.

“When you thought about price acceleration, you used to talk about places like Toronto and Vancouver,” Dugan said. “It doesn’t come through as loud and clear in the national numbers when some of the imbalances are occurring outside” the largest cities.

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