GTA's hot housing market fuelled by strong economy, but Bank of Canada governor concerned about debt

The GTA's hot housing market is a symptom of its rapidly growing economy compared to other parts of the country, but the expectation of perpetually rising prices poses a risk, says Bank of Canada Governor Stephen Poloz.

Poloz made the comments following a talk at Durham College on Tuesday morning.

• Upcoming Ontario budget to address red-hot GTHA market, finance minister confirms

Following his speech, Poloz answered reporters' questions, including two about housing in the GTA.

Asked whether it's too late for the Ontario government to try to address rising house prices,as Finance Minister Charles Sousa has pledged to do in hisupcoming budget, Poloz replied that it's a "complex question."

He noted that the GTA economy is "growing quite rapidly," and job creation is "running far ahead of the rate of growth in the rest of the country."

Indeed, Ontario added the most new jobs in January, according to Statistics Canada, with 28,800 new positions. And the Conference Board of Canada projects Toronto's real GDP willgrow by 2.6 per cent in 2017, second only to Vancouver.

The strong economic growth is fuelling the demand for housing, and supply can't keep pace, Poloz said.

And even though the fundamentals of economic and job growth are strong, "it's hard to reconcile the rates of growth that we've seen with identifiable fundamentals, which does suggest there is a degree of expectational dynamics involved," Poloz said, in reference to speculators in the market.

He added that it's currently difficult for economists to sift through all of those dynamics, but they are watching the market "with considerable interest."

"If people are buying homes purely on the expectation that their prices are going to rise further, then that's not fundamental demand, which I was talking about earlier," Poloz said after being askedwhether he's concerned about speculators whobuy homes merely to flip them and makemoney.

"And it's the sort of riskier type of transaction in a market that can go down as well as up in any situation."

The Bank's greater concern, he said, is the level of debt that Canadians are taking on.

Specifically, he's concerned about "how people are able to service that debt, both at today's interest rates and now of course the need to qualify at a higher rate of interest in order to ensure that they have a sustainable situation."

Housing market growth called 'unsustainable'

Last fall, Ottawa introduced new rules requiring that all insured mortgages undergo a stress test to determine if borrowers could still meet their mortgage obligations if interest rates go up or if their incomes decline. This was previously not required for fixed-rate mortgages longer than five years.

• New mortgage stress test rules kick in

In British Columbia, the government introduced a 15 per cent tax on foreign buyers, a move that Ontario is considering, among other potential moves, to try to cool the hot housing markets across the province. An increase in capital gains tax, for example, could help curb speculation.

Earlier this month, two of Canada's major banks warned that the rapid rise of home prices in Toronto is "unsustainable" and is fuelling a bubble.

• 2 big banks raise alarm over Toronto housing 'bubble'

The Canadian Real Estate Association also said earlier this month thataverage house prices across the Greater Toronto Area hit$727,300in February, a figure that has risen by more than 23 per cent in the past year.