According to a recent study, the average Canadian household’s net worth (total assets minus total liabilities) is, for the first time in recent history, higher than the average American household’s net worth; more than $40,000 higher, in fact. Is it Barack Obama’s fault? (or George Bush’s, depending on the internet commenter’s political persuasion)? Does this even mean anything? Let’s consider a few things before jumping to conclusions…Portfolio Composition MattersTalking about net worth is inherently tricky because net worth alone does not tell us much about the relative financial position of a household. We also want to know about the underlying portfolio composition: is their wealth easy to access (liquid) or is it tied up in housing? What type of debts do they have? Take, for example, two households with the same net worth of $25,000. Household A owns a home valued at $100,000 and owes a mortgage of $75,000 on that home. Household B has $5,000 in a checking account; $15,000 in a retirement account; and owes $5,000 on a car that they could sell for $10,000. While A and B technically have the same net worth, A’s net worth is more vulnerable to external market changes as it is entirely tied to the housing market, and they are less able than household B to tap into wealth in the face of unexpected financial emergencies such as job loss, medical crisis, or home repairs.The table presents the Environics Analytics estimates of Canadian and U.S. household net worth and its components in 2006 and 2011. Note that “Assets” is a broad category that includes the subcategories of bank deposits, bonds and commercial paper; mutual funds and stocks; and real estate. “Debt” is the total of both mortgage debt and non-mortgage debt, such as educational loans, medical bills, and consumer debt (i.e. credit cards). When we look at the household wealth composition and estimated changes between 2006 and 2011, we see that:
- Households in both the U.S. and Canada were hard hit by the global financial crisis, as shown by the large losses in the average balance of mutual funds and stocks.
- The wealth declines in the U.S., and most of the wealth gains in Canada, are entirely attributable to the housing market. The housing crash in the U.S. was the root cause of substantial wealth losses. Canada, in contrast, did not suffer a major hit to its housing market, although some speculate that they are also in a housing bubble that is about to burst.
- On many measures, the U.S. average is well above the Canadian average: Canadian wealth is more tied to housing; U.S. households have larger cash deposits, stock holdings, and disposable income; and U.S. households have less non-mortgage debt. In fact, the average Canadian household’s non-mortgage debt increased $8,000 between 2006 and 2011 while the U.S. average barely changed.
Average vs. Median