Good Debt VS Bad Debt

21 November 2012

The current focus of both Mr. Carney and Mr. Flaherty of our Federal Government seems to be: the ratio of consumer debt to disposable income: now sitting at 162%. This is at an all time high and both seem convinced that this will lead to a major housing correction and consumer bankruptcies. While this key statistic may have had some value when mortgage rates were above 10%, we think it has limited value today. But then Carney and Flaherty never had a 3% mortgage. That’s where good debt versus bad debt comes in. The Government feels that all consumer debt is bad. Our position is that if debt is used to purchase a consumable with no after purchase value, then that debt is bad. Examples would be unpaid debts for holidays, eating out, clothes, and even cars! Good debt is that which produces an income or is used to purchase an asset that will appreciate over time. For example: borrowing money to invest in stocks, a business, and real estate. Why can’t the Government produce a revised number which separates the good from the bad debt? CMHC already have rules in place to qualify a mortgage borrower. Their income to Gross Debt Service and Total Debt Service needs to be less than 32% GDS and 40% TDS to get a mortgage. There are no income rules to be a Tenant. In fact if a Landlord discriminates against a potential Tenant on the basis of income, the Landlord can be prosecuted! In fact one could argue that a signed lease for a year could be considered as bad debt – just like a car lease payment! You assume an obligation and there is no residual value! That seems to sum up the foolishness of focusing solely on consumer debt to disposable income as the sole determining factor of the health of the Canadian consumer.