OTTAWA - Canada's hot housing market will likely start cooling off this quarter and continue at a lower level over the next few years, Bank of Canada governor Mark Carney says.

Carney told the House of Commons finance committee Tuesday that economic activity, particularly the housing market, has rebounded strongly from recession -- perhaps too strongly in the case of housing.

And he warned that Canadians should think carefully about taking on more debt, giving that current "extraordinary" low interest rates are likely to rise.

"We see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance," he said.

"We share concerns there are groups of Canadian who run the risk of being overextended on their finances."

The comments were not new for Carney. He has been warning about the record level of debt being held by Canadians for almost a year.

According to the latest data, Canadian households on average owe $1.47 for every dollar of disposal income, an all-time high that is supported by the fact interest rates are at an all-time low.

On Monday, Re/Max reported that luxury home sales soared in the first quarter of 2010 - the January-March period-with Canada's three largest cities recording increases of 300 per cent (Montreal), 263 per cent (Toronto) and in the Vancouver region, 184 per cent. Home prices have largely returned and surpassed pre-recession levels as well.

Carney says much of the spending on housing, which includes spending on home renovations, has been pushed forward by super-low rates and by the home renovation tax credit.

That level of investment won't be sustained, he said, adding that fixed-term rates on mortgages have already begun to rise.

He was more coy on when the Bank of Canada will begin to tighten its stimulative monetary policy, however.

Last week, Carney dropped his conditional pledge to keep the bank's policy rate at 0.25 per cent until at least July, leading many economists to predict a quarter-point or even half-point hike was coming at the next opportunity, June 1.

Carney described the dropping of the commitment as the bank already moving to tightening because markets now don't know when he will act.

As for more direct monetary tightening, Carney appeared to perturbed that markets had interpreted his words as having signalled an early interest rate hike.

"Nothing is pre-ordained," he said.

"Those who are trying to divine what we might do, should spend their time not parsing words but thinking about the level of economic activity, the outlook for inflation and where rates should appropriately be."

But he also made clear that rates will rise, if not on June 1, then possibly in July because the Canadian economy no longer needs an emergency monetary policy.

"Our message is that those extraordinary times ... have passed or are passing," Carney said.

Much of Carney's two-hour testimony was spent re-iterrating the bank's latest economic outlook, which it unveiled last week. In the bank's view, the Canadian economy will beat the G7 advanced economies with a 3.7 per cent growth rate this year, but will slow to 1.9 per cent by 2012, near the bottom of the pack among the G7.

That's partly because of Canada's aging demographics, but also Canada's woeful productivity growth record, he said.

The governor called on the country's corporations to invest more in machinery and equipment to improve productivity, saying that is the only way the economy can expand faster.

On the global recovery, Carney said the biggest risk involved exit strategies as governments move from pumping money into the system to taking action to control their mounting debt problems.

The governor also defended Finance Minister Jim Flaherty's opposition to a bank tax, which Canada helped derail in the meeting of G20 nations in Washington last week.

Carney said such a tax would lead to riskier behaviour on the part of financial institutions and would likely not be available in the next crisis since most governments would likely not set the proceeds aside for a rainy day, but pocket the new revenues.