Chad Anderson
There's been much talk about rising debt levels in Canada: according to the latest release of the national balance sheet, average debt stood at $45,000 per household.
But as Carleton University economist Nick Rowe has pointed out on several occasions on Worthwhile Canadian Initiative (for example, here, here and here), the notion of 'average debt' is worse than meaningless.
To a rough approximation, average debt is always zero: what is a debt to one person is an asset to another. If you add them up, the debts and the assets cancel out, so total net debt is zero. Dividing the total by the number of people will produce an average of zero.
(Adding government debt and the world outside Canada to the story changes this story only slightly.) If anything, any intuitively sensible measure for average debt should be negative, since average net worth is positive.
What matters is the distribution of debts and assets across households. A problem worrying policy makers is what will happen when interest rates and mortgage payments rise. Households who have relatively high incomes can generally absorb higher mortgage payments, and these higher debt payments may even be more than offset by higher returns on their assets. And households who face tighter budget constraints, but still have significant equity in their homes, have the option of selling their existing house and taking out a smaller mortgage elsewhere.
The real policy challenge is posed by people who cannot absorb higher payments, and who may not be able to sell their house at a price that will cover their mortgage. Average debt is at best an uninformative measure for the potential size of this problem; more disaggregated survey data are required. This is the approach taken in the Bank of Canada's Financial System Review, which regularly reports the results of 'stress tests' that focus attention on those who are most vulnerable to financial shocks.
Averages are usually the most useful way of summarizing a large amount of data in a single number. But not always: average debt is a statistic that receives far more press than it should.
Follow Economy Lab on twitter