The finance minister's statement came after the Bank of Canada announced the policy interest rate will stay at the super-low one per cent, even though such attractive credit conditions is likely to result in Canadians borrowing more.
Economists say the bank's signals suggest interest rates may stay at current historic low levels for at least another year, and possible two.
"Very favourable financing conditions are expected to buttress consumer spending and housing activity," the central bank's policy council said.
"Household expenditures are expected to remain high relative to GDP (gross domestic product) and the ratio of household debt to income is projected to rise further."
Flaherty and bank governor Mark Carney have been warning for some time they are concerned low interest rates, which have been in place since 2009, are luring Canadians to take on more debt than they can afford.
Household debt to annual disposable income is already at 153 per cent, an all-time high, with about 70 per cent of the debt Canadians carry being in mortgages.
Flaherty said he does not believe Canada's housing market is a bubble, with the possible exception of two hot spots — the condo market in Vancouver and Toronto. But, he said he is monitoring the situation.
"We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we're not about to intervene now," the minister told reporters.
Ottawa tightened mortgage rules on three separate occasions in the past four years. Each time housing activity slowed temporarily, but then resumed its previous pace.
In a statement accompanying the interest rate announcement, the central bank implied it has no choice but to keep borrowing costs low to spur economic activity.
The bank said the global economy has, if anything, "deteriorated" since its last forecast in October and risks arising from the European debt crisis have intensified. For Canada, the global weakness will restrain exports and business investment.
"While the (Canadian) economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisioned," the central bank's policy council, headed by governor Carney, reported.
Economists said the tone of the report suggested the bank won't move to raise interest rates until 2013, and the CIBC said it doesn't expect rates to rise until as late as 2014.
"The Bank of Canada is caught between a rock and hard place," said Derek Holt, Scotiabank's vice-president of economics.
"They cannot tailor monetary policy to address a specific problem, which is elevated house prices, and at the same time (Carney) has to weigh that against the bigger macro picture, which is the total global risks. I think he's doing the right thing by straying toward global risks."
The Canadian dollar rose 0.27 of a cent to 98.5 cents US.
Capital Economics economist David Madani said there was nothing in the statement that would make him alter his view the bank's next move is to cut the rate — to 0.5 per cent sometime this spring.
As he has in the past, Flaherty noted that Canadians need to be careful about how much debt they take on because eventually interest rates and the costs of servicing debt will have to rise.
But Canadians have little heeded the warnings, in part because they see no indication rates will rise soon.
Last week, the Bank of Montreal led a race to the bottom on interest rates by dropping its promotion fixed five-year mortgage to an ultra-low 2.99 per cent. The bank's prime lending rate is three per cent.
The difficulty Carney faces in raising rates, said CIBC senior economist Peter Buchanan, is that clamping down on borrowing applies more brakes on an already slow-moving economy.
As well, since the U.S. Federal Reserve has signalled it's on hold with an even lower interest rate, Carney would need to see robust economic activity in Canada to risk a rate increase that would have the effect of boosting the dollar.
"The bank is sitting on the fence until 2014 (because) if anything the statement was a bit more dovish than we were expecting," Buchanan said.
The bank said it now expects the economy to grow by two per cent in 2012, one notch higher than its previous forecast, although the rate of growth is slower. That's because growth in the second half of 2011 was higher, leading to a stronger hand-off to the new year.
The higher starting point also means the output gap — the measure of when the economy is running on all cylinders — will close three months earlier than expected, in the fall of 2013, the bank said.
When all the data is in, the bank said growth last year will average 2.4 per cent, three-tenths more than previously anticipated. It now expects growth in 2013 to average 2.8 per cent, one tick lower.
But the bank's mind is clearly focused on external risks, particularly Europe. It said it expects European leaders will be able to prevent credit contagion from spreading, but it warns the risks are increasing.
"The recession in Europe is now expected to be deeper and longer than the bank had anticipated," it said.
"The bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks."
Elsewhere, the bank acknowledges U.S. growth has been stronger, but China is decelerating to more sustainable levels.
The bank remains sanguine about inflation risks, although it said consumer price growth for this year will be slightly higher than it thought. Still, it judged: "Inflation expectations remain well-anchored."