By Leah Schnurr and David Ljunggren
OTTAWA (Reuters) - The rapid pace of home price increases in Toronto and Vancouver is unlikely to continue, while the potential for a downturn is growing, the Bank of Canada said on Thursday in one of its more direct warnings on housing.
The two cities have prompted concerns of a bubble with price growth accelerating even as other regions related to the oil sector have slowed.
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The extent of the increases over the past year points to the possibility that prices are being supported partly by expectations that they will keep going up, the bank said.
In a signal to those tempted to buy houses solely to make a profit, the bank said it was unlikely that economic fundamentals would justify continued strong price increases.
"This suggests that prospective homebuyers and their lenders should not extrapolate recent real estate price performance into the future when contemplating a transaction," said Governor Stephen Poloz. "Indeed, the potential for a downturn in prices in these markets, although difficult to quantify, is growing."
The bank's comments were part of its semi-annual Financial System Review, which found that households' vulnerability to a shock have risen. But with the economic outlook improving, the overall level of risk to Canada's financial system was largely unchanged from the previous six months.
The review was unlikely to have much impact on monetary policy, economists said. After cutting interest rates twice last year, the bank is seen on hold well into 2017. [CA/POLL]
The bank would likely use higher rates only to cool the housing market in extreme circumstances, said Royce Mendes, economist at CIBC Capital Markets.
"That leaves it up to other policymakers to quell the growing concerns," Mendes said.
Canadian governments have acted five times since 2008 to clamp down on heated markets, most recently in December 2015.
The challenge is that the market has become more fractured. Vancouver and Toronto are booming, while prices in energy-producing Alberta are weak and the rest of the country is showing modest increases.
"When you talk about federal government action, we have such heavy levers that impact the entire country," Prime Minister Justin Trudeau said in an interview with BNN that aired on Thursday. "We have to be very careful about how we engage."
Vancouver prices were up 25.3 percent in April from a year earlier, with Toronto up 12.6 percent, according to the Canadian Real Estate Association. Excluding the two markets, home prices were up 8.7 percent.
(Editing by Nick Zieminski and Alan Crosby)