The Canadian Mortgage and Housing Corporation is expanding like never before. Ottawa has just raised their mortgage insurance cap from $450 billion to $600 billion. At the end of 2007 the cap was $350 billion. Garth Turner already has a great post on this subject at Greaterfool.ca, so I thought I’d focus on one aspect of this topic: Does the governments actions make it rational to buy more house than you can afford? This comment by “hp” is from Turners blog:
First time buyers putting 5% down may be acting rationally. Perhaps they realize they are taking a chance on bankruptcy. Five years down the road, if interest rates are high and property values have dropped, they may be willing to file for bankruptcy. In the meantime, they had a nice house. Also, there is new legislation that RRSPs will be protected during personal bankruptcy. Why not put all your savings in your RRSP and pay minimum payments on your house? Then see what happens when your huge mortgage comes up for renewal in 2014?
There is some logic to this approach if you’re willing to file for bankruptcy and can protect the bulk of your savings in an RRSP. The government is clearly saying that saving up more than a 5% down payment is a hardship you should not have to endure. They seem to be saying they will do what they can to keep fueling the housing market, no matter how risky or silly their actions may be. What are new home buyers to do? Go along for the ride or sit out and save in the hope of a US style return to sane pricing?