IN MATTERS of finance, if not climate, Canada is usually temperate. It was barely moved by the economic storms that blew the roof off America and Europe in 2008-09. Its banks were steady, it was argued, in part because they were shielded from the ferocious competition for market share that pushed banks elsewhere into hazardous loans. For all that, in its housing market Canada has lately become a place of extremes. Household debt has climbed to almost 170% of post-tax income. House prices rose by 20% in the year to April. Looked at relative to rents, they have deviated from their long-run average by more than any other big country The Economist covers in its global house-price index. In Toronto, one of two cities, along with Vancouver, where the boom has been concentrated, rental yields are barely above the cost of borrowing, even though interest rates are at record lows. In its twice-yearly health-check on the financial system, published this month, the Bank of Canada concluded that “extrapolative expectations” are a feature of the market. In other words, people are buying because they hope, or fear, that prices will keep rising.

Canada is not alone. House prices also look high relative to rents in Australia, where a few cities, notably Sydney and Melbourne, are booming. Prices in some American cities, such as Seattle and San Francisco, have been rising much faster than the national market, which looks reasonably priced.

Common to all these cities are buyers from emerging markets, notably China, who have helped to drive a wedge between the price of homes and the local fundamentals of incomes and rental payments. They are willing to pay above the odds to secure a safe place for their savings. Though fairly small in number, their presence is enough to inflate bubbles.

Canada’s housing market thus opens a window on a tragic flaw in the global economy. In only a few decades China has mastered the manufacture of high-quality goods. But it takes far longer to be able to manufacture safe stores of value. Instead, their affluent citizens seek out rich-country assets, including houses. This fundamental mismatch limits the ability of policymakers to stop bubbles from inflating.

Raising interest rates, which stand at just 0.5% in Canada, might seem the obvious answer. The economy is recovering and this week the Bank of Canada’s deputy governor has hinted that rates might climb. But several rises in succession might be needed to cool the housing market and that would probably send the economy into recession.

The authorities have instead attempted to deal with the problem at its source. Last summer Vancouver imposed a 15% tax on foreigners’ house purchases. The city’s property market has since cooled. But one effect of this extra tax has been to shift housing demand to other places, such as nearby Victoria, and to Toronto, where house-price inflation is above 30%. The province of Ontario imposed a similar tax in April, prompting fears of a price surge in Montreal. To improve the supply of rental properties, Ontario has also permitted cities to slap a tax on vacant homes. That will help, but it will not solve the problem. There are tentative signs that prices in Vancouver are reviving, suggesting that the tax there has only deterred foreign buyers temporarily. In any event, some foreign owners hope to settle in Canada soon, and so will be entitled to claim a rebate.

There is no fail-safe administrative tool for curbing house-price booms. The best course is to insure against the fallout from a house-price bust. Canada has been more active in this than most countries. People with mortgages above 80% of the value of the home on which it is secured are obliged to pay for insurance against default. The underwriting standards on such mortgages have been steadily tightened. Canada’s biggest banks have some protection against potential storms. They are highly profitable and exceed international benchmarks for capital (see article).

Strong foundations

Even so, a further tightening of such macroprudential measures would be wise, not because it would do much to slow the rise in house prices but as insurance against their eventual fall. The demand from emerging markets for safe assets will not soon diminish. Recent history shows that big run-ups in property prices often reverse suddenly. Better to batten down the hatches now in case the weather turns bad.