By Julie Gordon and David Ljunggren
OTTAWA (Reuters) - A rush of investors into Canada's housing market has likely helped fuel the belief prices will keep rising and that could increase the chance of market correction, a deputy governor of the Bank of Canada said on Tuesday.
Paul Beaudry, in a virtual speech to a provincial regulator, also said Canada's main financial system vulnerabilities - housing market imbalances and high levels of household debt - had been intensified by the pandemic.
"A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can become self-fulfilling, at least for a while," he said.
"That can expose the market to a higher chance of a correction."
Beaudry later added that while house price gains can be expected when interest rates are low, the central bank becomes concerned when it starts seeing signs of "panic buying or ... extrapolative expectations".
That type of dynamic is unhealthy and can drive the market further away from fundamentals, which can lead to corrections, he said.
Still, Beaudry noted "somewhat slower" house price growth over the summer should lower the chances of undesirable extrapolative price dynamics. When asked if foreign investors were fueling the exuberance, he said bank data showed the push was from domestic investors.
"These are Canadians buying these investment properties... and potentially putting them on the market to rent or just holding them," he said.
Housing prices soared through early 2021, surging to a peak in March before slipping over the summer months. They have again picked up steam, nearing that record in October, according to realtor data.
At the same time, the central bank has seen an increase of riskier high loan-to-income ratio mortgages, leaving people more vulnerable to rising rates. It signaled last month that it could start hiking rates as soon as April 2022.
"Vulnerabilities linked to elevated household debt appear to be rising again after a slight pause," said Beaudry.
He made clear that Canada's financial system was sound, but said a drop in housing prices could affect household spending and that could impact employment.
(Reporting by Julie Gordon in Ottawa; Editing by Alex Richardson and Mark Heinrich)