TORONTO—Canada took a series of steps aimed at cooling housing markets in the country’s biggest cities, including addressing concerns about foreign investors’ influence in driving up home prices to frothy levels.
The moves follows months of mounting worries about how foreign cash has contributed to soaring house prices in Toronto and Vancouver, British Columbia, and highlight the dilemma facing policy makers looking to balance prolonged rock-bottom interest rates with outsize housing-related debt.
Low rates have helped fuel Canadian housing activity, which remains a key driver for the economy amid the negative fallout from slumping commodity prices. However, the Bank of Canada has identified the record household debt levels, mostly because of large mortgages, as a risk to financial stability.
Even so, Canada’s central bank has signaled it intends to keep rates low for the foreseeable future, as growth remains stagnant because an expected pickup in nonenergy exports has failed to material.
Canadian Finance Minister Bill Morneau said the fresh round of policy measures is meant to address affordability in Canada’s biggest cities. That includes in Vancouver, on Canada’s west coast, where Prime Minister Justin Trudeau has said housing had become a "significant crisis."
"We are recognizing that there are multiple issues that are impacting the market over the long term and we need to have measures in place that ensure its stability," Mr. Morneau said at a press conference Monday in Toronto.
Governments such as Canada’s are taking the lead in addressing vulnerabilities to financial stability, such as potential housing bubbles, in light of low interest rates. With the exception of the U.S. Federal Reserve, most developed-world central banks are looking at either easing policy further, or keeping rates low, to stoke growth.
Bank of Canada Gov. Stephen Poloz has gained increased flexibility with Mr. Morneau’s round of measures, said Frances Donald, an economist at Manulife Asset Management. The central bank has been reluctant to date to adopt a more dovish tone amid slower growth, she said, for fear of further exacerbating existing household imbalances.
"It doesn’t mean the Bank of Canada is free to cut interest rates—but it takes the edge off the concern that the housing market and household debt is a significant reason to avoid another cut," she said.
Among the measures unveiled by Mr. Morneau on Monday was a provision to prevent foreigners from claiming a so-called capital-gains tax exemption on Canadian homes bought and then sold in the same year.
House prices in Vancouver and Toronto in August surged about 33% and 17%, respectively, on a 12-month basis, recent Canadian Real Estate Association data indicated. Last week, Swiss lender UBS Group AB identified Vancouver as most at risk of enduring a housing crash, and identified strong demand from foreign buyers as a factor pushing up prices.
Frothy conditions prompted the province of British Columbia to impose a 15% surtax in August on foreign-led housing purchases. Recent data from British Columbia suggest the surtax is already having a dampening effect on sales.
The government’s policy direction "is clearly a gesture aimed at Vancouver and Toronto that attract most of the foreign interest in Canadian housing," said Derek Holt, economist at Bank of Nova Scotia. "When this move is added to British Columbia’s high tax on foreign purchases…it makes Vancouver much less attractive if not downright off the radar screens of foreign buyers."
In addition to the tax measures targeting foreign buyers, Mr. Morneau said Canada would later in October require all insured mortgages to undergo a "stress test" to ensure new homeowners can afford their mortgages.
BMO economist Sal Guatieri said this move, based on how the government plans to construct the stress test, will make it harder for buyers to qualify for a loan, especially in high-priced regions.
Write to David George-Cosh at david.george-cosh@wsj.com and Paul Vieira at paul.vieira@wsj.com