Policy makers should move quickly and aggressively on fears of speculation in Canada’s housing market, observers warn.

“The sooner that governments can provide a clearer picture of how much speculative investment is driving these price moves and take meaningful action to curb the excesses, the better the chance of avoiding a messy outcome,” said BMO Nesbitt Burns senior economist Sal Guatieri.

His comments followed those of Bank of Canada deputy governor Lawrence Schembri, who said last week that he and his colleagues are concerned that speculators are helping to fuel the rapid rise in prices in the country’s hot markets.

The Toronto and Vancouver housing markets are roaring ahead, with huge price gains reported month after month.

Those increases can be attributed to lower interest rates and strong labour markets, but there has to be more behind it, Mr. Guatieri said.

Incomes aren’t rising fast enough to account for the price surge, the BMO economist said. Nor can you tie it all to the “diminishing supply of available land” or an influx of job-seeking millennials.

“That leaves two other drivers – foreign wealth and speculation,” Mr. Guatieri said in a recent research note.

“Growing evidence suggests the former is a key factor, which offers hope that both markets will be spared a severe correction if the inflow of wealth continues,” he added.

“If speculation is also at play – and the number of homes bought and sold within a year in Vancouver has indeed turned higher – then both regions could face a downturn.”