The Bank of Canada backed away Monday from its recent warnings about a real estate bubble in Canada.

In a speech in Edmonton, bank official David Wolf ruled out increasing interest rates to discourage mortgage lending.

The Bank of Canada says it sees the housing market 'requiring vigilance, not alarm.' (CBC)

Wolf, an adviser to bank governor Mark Carney, said that in the central bank's view it is premature to be talking about a housing bubble in Canada.

"We see the housing market requiring vigilance, not alarm," he said.

He added that even if the bank was convinced housing prices were getting out of hand, raising interest rates would be too blunt an instrument, since it would mean cooling off all economic activity.

"We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession," he said in a speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates. Moreover, he noted with starts below long-term demographic requirements, the number of houses on the market is still declining.

Better ways to cool market

Wolf, a former chief economist with Merrill Lynch Canada, said there are better ways to cool the housing market.

Finance Minister Jim Flaherty has also mused about such measures, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a house can be amortized from the current 35 years.

The bank has been highlighting for months the danger of Canadians getting in over their heads in purchasing homes, warning that buyers should ensure they don't take on too much debt.

The bank's worry is that homeowners with large mortgages that are manageable now with interest rates at record lows won't be able to afford their monthly payments once interest rates start rising, as is expected later this year.

On the economy as a whole, Wolf said the bank believes the recovery is still dependent on government support and that "growth driven by the private sector has yet to materialize."

Notes from the speech were posted on the bank's website.

With files from The Canadian Press