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Bank of Canada Governor Mark Carney’s patience with rising housing debt may be ending.

The Bank of Canada said yesterday it “may become appropriate” to begin raising its policy interest rate again after keeping it at 1 percent and extending the longest pause since the 1950s, saying record high household debt levels remain “the biggest domestic risk” to the economy.

Carney is signaling the potential for increases even as the U.S. Federal Reserve says it expects to remain on hold for two more years. Higher borrowing costs may cool off a housing market that has seen real estate prices almost triple in some Canadian cities over the past decade.

“Monetary policy should be considered as one of the tools you should use to cure the problem” of rising household debt, Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial Group, said by telephone. “Monetary policy is what is causing the problem.”

Carney has frozen his main interest rate since September 2010 on signs that a strong currency and fragile global recovery will restrain exports, while at the same time warning that rising household debts risk derailing the recovery if the housing market corrects suddenly.

Real estate markets in cities like Toronto and Vancouver, where prices have almost tripled over the past decade, have created a dilemma for Carney and Finance Minister Jim Flaherty: how to avert a bubble in overheated areas without triggering a collapse elsewhere and undermining the recovery.

Monetary Policy Report

Carney may provide more guidance on how concerned he is about the housing market in a quarterly monetary policy report today, said David Tulk of Toronto-Dominion Bank.

“They recognize that as long as their policy rate is still encouraging this kind of behavior, the longer it runs, the harder it is to clean up,” said Tulk, chief macroeconomics strategist at TD Securities.

The central bank’s report is due at 10:30 a.m. today in Ottawa, with Carney holding a press conference at 11:15 a.m.

The Canadian dollar jumped as much as 1.3 percent yesterday after the central bank’s announcement, while two-year government bond yields rose 10 basis points to 1.33 percent, the highest since August, as investors bet Carney may increase interest rates this year. The difference between two-year Canadian and U.S. government notes widened to 1.06 percentage points.

The average sale price of a home in Canada has risen 98 percent over the past decade, and 35 percent since January 2009, according to data from the Canadian Real Estate Association. Canada’s household debt relative to disposable income was at 152.9 percent in the final quarter of last year, after touching a record 154.2 percent in the previous three months.

Voiced Concerns

Carney has repeatedly voiced concerns about household debt since a June speech in Vancouver and has said that monetary policy could be used to address rising levels of household debt that threaten financial stability. He’s also said that such action is the last line of defense, as policy makers should look first to proper regulation and supervision to safeguard stability.

Flaherty has tightened mortgage rules three times since 2008, including by shortening the maximum amortization period for government-insured mortgages to 30 years from 35 years, and lowering the maximum amount homeowners can borrow against the value of their homes. Still, he has resisted calls to act again, citing his preference for the market to correct itself.

Vancouver, Canada’s third-largest city where condominiums are being sold for as much as C$28.8 million ($29.1 million), has seen average home sale prices fall by more than 8 percent since touching a record high of C$831,555 in May 2011. Realtors in Vancouver sold 30 percent fewer homes in March than a year earlier.

No Spillover

That correction hasn’t spilled over into other markets. Home prices in Toronto were up 11 percent in March from a year earlier, while the number of multiple-unit construction starts rose 50 percent in Ontario last month, according to data from Canada Mortgage & Housing Corp.

Flaherty on April 13 said he was “encouraged” that Vancouver real estate seems to be correcting, and the national housing market is “softening.” Toronto-Dominion Chief Executive Officer Edmund Clark said yesterday he predicts the country’s housing market will slow down.

“It’s obviously been a source of tremendous growth in our core Canadian banking business,” Clark said at an investor conference.

Charles St-Arnaud, an economist with Nomura Securities International Inc. in New York, said monetary policy also may be a less risky way to slow the housing market than regulatory measures that may trigger an abrupt correction.

“When you look at other solutions, it’s probably the one that has the less probability of causing the collapse of the housing market,” St-Arnaud said, adding the Bank of Canada can move ahead gradually with rate increases. “Interest rates are probably the best approach.”

It’s a title Vancouver is more than happy to relinquish.

Canada’s hottest real estate market is finally cooling off, new sales figures show, much to the relief of those who have grown weary of talk of a West Coast property bubble.

At more than $761,000, the average cost of a Vancouver home is still higher than anywhere, but was 3.1 per cent lower in March than in the same month last year. Sales activity is slower, too, down 22.3 per cent through the first three months of 2012.

But the data from the Canadian Real Estate Association indicate that Toronto’s sizzling market is still gaining momentum, with average prices in the country’s largest city soaring more than 10 per cent last month, to about $504,000.

The diverging fortunes of the country’s two most important real-estate markets adds to the complexity of the policy decisions facing Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. Both have issued repeated warnings about the high level of personal debt that Canadians are taking on to buy increasingly expensive houses.

But Mr. Flaherty has said he is reluctant to tighten the rules on mortgages again, believing that the market will correct itself, while Mr. Carney is unlikely to raise interest rates any time soon for fear of driving up the currency and hurting other parts of the Canadian economy.

Toronto and Vancouver together account for about one-quarter of all real estate activity in Canada.

The opposing directions of the two cities have resulted in a country-wide average price that’s edging lower, easing economists’ concerns of a U.S.-style crash. And should the trend continue, it may also ease the worries of officials in Ottawa.

“When it comes to housing, Toronto is not Canada, nor is Vancouver,” Douglas Porter, an economist in Toronto at BMO Nesbitt Burns, said in a report.

“For most cities, the market looks well balanced, and is broadly moderating on its own accord.”

Nationally, the average price of a home fell 0.5 per cent to $369,677 in March from last year while sales rose 1.6 per cent.

“The slight decline in the national average price points to a tug of war between Toronto and Vancouver,” Gregory Klump, chief economist for the Canadian Real Estate Association, said in a statement. “The decline in average price reflects the change in Vancouver’s sales mix, not housing price deflation.”

Despite the price drop, few in Vancouver are calling this a correction. The spring of 2011 saw a spike in sales of expensive luxury homes in Vancouver that is now skewing the data for 2012, some argue.

Real estate agent Steve Di Fruscia, who specializes in selling high-end homes, said the Vancouver market, particularly in pricey areas such West Vancouver, are in the midst of a “typical cooling-off period,” after the frenzied activity of a year ago

“We’re still on a very optimistic, greedy part of the year where people are trying to cash in on extra high prices, believing that we will have the same spring as we did last year and prices will continue to skyrocket another 10 to 15 per cent,” he said.

Mr. Di Fruscia markets his clients’ properties in both Canada and mainland China. Some have blamed Vancouver’s high prices on an influx of so-called “foreign” and “speculative” money from foreign investors. However, Mr. Di Fruscia said 95 per cent of his sales of Vancouver homes are to Chinese buyers who are immigrating to Canada as citizens or permanent residents.

There are no statistics on what, if any, impact foreign investors are having on the real estate market in Vancouver, Toronto nor the rest of Canada. Cameron Muir, chief economist of the B.C. Real Estate Association, suggested that in Vancouver, the number of foreign buyers are “much lower” than many people think, accounting for between 1 per cent and 3 per cent of the market.

In Toronto, a low supply of properties is leading to bidding wars that drove up the average price of Toronto homes to $504,117 in March. Toronto’s average home prices have set a new record high in every year since 2000 and 2012 should be no different.

“We’d love to have more inventory to sell because there’s no shortage of buyers looking for good inventory,” said Kevin Somers, the broker area manager for Royal LePage Real Estate Services Ltd. in central Toronto.

“As long as the basic economic indicators and interest-rate outlook remain positive, people will always need a place to live and would rather own than rent in most cases.”

Canadian real estate agents may have recorded the first year-over-year sales drop in 11 months in March, regional data suggest, as the Vancouver market plunged.

The value of purchases reported by 11 regional real estate boards fell 1.1 percent from a year earlier to C$12.4 billion ($12.4 billion), as the number of homes sold fell 1.4 percent, according to real estate board data compiled by Bloomberg News. Those markets had a 9.1 percent annual rise in value during the prior month.

Policy makers, including Finance Minister Jim Flaherty, have said parts of Canada's housing market have become overvalued as households add to record debt levels, encouraged by historically low mortgage rates. Canadian builders began work in March on the most housing units since 2008, led by condominium construction in Toronto, the country's biggest city, Canada Mortgage & Housing Corp. reported Friday.