FvS Wealth Price Index for Germany

Q4-2023: Higher interest rates put pressure on asset prices

In 2023, prices for the assets of private German households fell by -2.9 %. Asset price deflation has now continued for six quarters in a row. Last year, asset prices were particularly affected by the volatile development of key and market interest rates.

What is the FvS Wealth Price Index?

The Flossbach von Storch (FvS) Wealth Price Index measures the price development of the assets held by German households. The index corresponds to the weighted price development of real and financial assets owned by German households. In addition to real estate and business wealth, real assets also include durable consumer goods as well as collectibles and speculative items. Financial assets are divided into shares, bonds, saving deposits as well as other financial assets. Real estate is by far the largest category (63.7 %), followed by business wealth (11.7 %) and cash holdings (10.5 %).

With the publication of this index, both the year of weighing and the year of indexation were moved from 2014 to 2017. This leads to forced changes in past index levels. 2017 was chosen as the weighing year because the publication of the third wave of the study "Private Haushalte und ihre Finanzen " by the Deutsche Bundesbank (Deutsche Bundesbank: Monatsbericht April 2019) provides new data on the asset composition of German households. All sources that were also used for the weighing scheme have also been updated with 2017 data.

Asset prices: Interest rates depress real assets but lift financial assets

Prices for real assets held by private German households fell continuously throughout 2023 and were -4.4% cheaper at the end of the year than at the end of the previous year. This is the biggest fall in prices for real assets since 2009, although there were different price trends within real assets.

The development and expectation of interest rates shaped the development of financial assets. Compared to the end of the previous year, prices for financial assets owned by private households rose by +3.1 %. The fourth quarter of 2023 accounted for more than half of the increase.

Real assets: Interest rate trend decisive

Prices on the German real estate market fell throughout the year. At the end of the year, the real estate assets of private German households (as measured by the vdpResearch price indices) were trading -6.5% lower than at the end of the previous year.1 This is the sharpest fall in prices for real estate assets since the start of the time series. Prices fell across all property types. They were particularly strong in the office and retail property segment, although these only account for a small proportion of private real estate assets. However, prices for owner-occupied residential properties, such as owner-occupied houses and apartments, also fell significantly.

The reason for the fall in prices on the real estate markets is the rise in mortgage interest rates, which has made financing a property significantly more expensive for buyers since the end of the low interest rate policy. Mortgage interest rates climbed to over four percent in 2023, compared to around one percent just two years previously. It was not until the fourth quarter of 2023, when expectations of further increases in key interest rates in the USA and Europe became gloomier, that mortgage rates also fell again somewhat, although this was not reflected in real estate prices.

In addition, construction, renovation and energy costs, coupled with stricter regulations for heating systems and a low level of new construction activity, also put pressure on property prices. The current weakness in economic growth is also having an impact on commercial real estate.

As the supply of residential properties remains scarce, particularly in metropolitan regions, and there have only been a few real estate transactions in recent quarters, the fall in prices has not been any greater.

Prices for business wealth (privately owned companies) were +9.2% more expensive at the end of the year than at the end of the previous year. In addition to uncertainties about future real economic growth in Germany, the development of interest rates also played a significant role in the prices of business wealth. While the ECB raised interest rates in the third quarter of 2023, expectations of further interest rate hikes fell, causing prices for business wealth to rise again despite continued weak growth.

Price increases for consumer durables continued to slow in 2023. At the end of the year, durable consumer goods were trading for +3.2% more than at the end of the previous year. In comparison: in 2022, price increase rates were still over eight percent. The substantial price increase in the meantime was due to supply chain problems and higher prices for labor, energy and intermediate products. However, these problems improved over time, meaning that the rate of price increases slowed over the course of the year. In individual cases, such as audio, photo and information devices, prices even fell in the meantime.

Consumer price inflation, rising interest rates and economic uncertainty had driven prices for collectables and speculative items to new highs over the past two years. However, the tide turned from the middle of the year onwards and prices for collectibles and speculative items fell for the first time since the pandemic. At the end of the year, they were still only +3.1% more expensive than at the end of the previous year. Prices even fell in both the third and fourth quarters. Only the prices of art objects recorded significant price increases in 2023.

1 The German Real Estate Index (GREIX) offers an alternative for measuring price changes on the German real estate market, but so far only takes into account 18 German cities, which comprise less than a fifth of the German population and is therefore not suitable for measuring the price change in the assets of all German households. The GREIX shows a higher price decline on the German real estate market for the same period. The reason for the significantly higher price decline than in the vdpResearch measurement is to be found in the differences in the methodologies for quality adjustment.

Financial assets: Recovery in the fourth quarter

At the end of the year, prices for the equity assets of private households were 12.0% higher than at the end of the previous year. While prices fell in the third quarter due to interest rate hikes and the increasingly apparent economic weakness, prices on the stock markets rose significantly in the fourth quarter. This was due to the lack of interest rate hikes and the expectation that further interest rate hikes in both the US and the EU were unlikely in the coming quarters. Despite no improvement in the economic situation in the eurozone, the stock markets in Europe recorded significant price gains.

The expectation and development of key interest rates in the USA and Europe shaped price trends on the bond markets. While the increases in key interest rates continued to depress bond prices in the first three quarters, the picture reversed in the fourth quarter. The lack of interest rate hikes led to the expectation that further interest rate hikes were unlikely and that interest rate cuts could even occur in the coming year. At the end of the year, the price of German households' pension assets was +0.9% higher than in the previous year. The price increase of +4.1% in the fourth quarter more than compensated for the fall in prices in the first three quarters of the year. The recovery in the fourth quarter was particularly strong for bonds in Germany and Europe.

The price of other financial assets, which is measured by the price of gold and commodities traded on the stock exchange, rose by +2.4% compared to the end of the previous year. While the price of gold rose over all four quarters, commodity prices fell in three of the last four quarters.

The prices for savings and demand deposits remain unchanged by definition.

By net wealth: Price decline due to real estate ownership

In the cross-section of the net wealth of private German households, asset prices fell across all quantiles and ranged between -0.2 % and -4.0 %. The greatest fall in prices occurred among households in the upper middle class due to their relatively high proportion of real estate assets.

By household age: Biggest price drop for pensioner households

In the cross-section of household ages (measured by the age of the household's reference person), prices fell by between -1.8 % and -3.7 %. As younger households are less likely to own real estate, they only experienced slight price declines for their assets, while older households suffered sharper price declines due to the higher proportion of real estate assets.

Price indices in comparison: Consumer price inflation decreases

The rate at which consumer prices rose in the past year has increasingly declined. While annual consumer price inflation measured by the German Statistical Office's (destatis) consumer price index was over eight percent at the beginning of the year, prices at the end of the year were only +3.5% higher than at the end of the previous year.

Producer prices fell significantly over all four quarters, so that at the end of the year they were -9.2% below the end of the previous year.

The FvS Wealth Price Index measures the price change of assets held by German households. The index is calculated using the Laspeyres method as a weighted average of time series of indexed prices which reflect the change in the prices of assets in euro. The index is based on the average for the year 2021. Where necessary, quality-adjusted time series have been used and gains, such as interest payments, have not been taken into account. There is no valuation approach employed. For the asset class shares, for example, the share prices and not the price-earnings ratio are taken into account. This corresponds to the procedure for commodity price indices, in which only commodity prices and not the price-utility ratio are included.

The relevant assets are selected via the study "Private Haushalte und ihre Finanzen" (PHF) of the Deutsche Bundesbank (2023). The weighting scheme of the time series is based on the survey results of the 2021 PHF study and corresponds to the share of assets in the total assets of German households. The composition of household assets in the cross-section of the population across wealth and the age of the household members is very heterogeneous. Therefore, the FvS Wealth Price Index is additionally calculated for different quantiles of the distribution of net wealth of German households (total wealth less liabilities) and for different age groups (measured by the age of the reference person of the household).

The assets of a household are divided into various sub-groups of real assets and financial assets. Real assets include real estate, business wealth (net), consumer durables, and collectors' and speculative items. Financial assets include savings deposits, shares, bonds and other financial assets. Assets in the form of funds units and credit balances under cash value insurance contracts are allocated to the aforementioned components according to their respective composition.

The price development of real estate assets is recorded by the VDP real estate price indices of vdpResearch GmbH. For owner-occupied residential property, the "owner-occupied homes" and "owner-occupied apartments" indices are weighted accordingly. For other properties, the development of the capital value of apartment buildings, office properties and retail properties is used and weighted accordingly. For indices that are only available during the year from 2008 onwards, quarterly values prior to 2008 are approximated using average annual growth. The resulting price index for real estate assets corresponds to the indices for owner-occupied and other properties weighted according to the distribution of assets.

Private business wealth comprise all non-publicly traded participations of private households. The price development is approximated by the SDAX price index of Deutsche Börse, which records prices for medium-sized companies. The SDAX price index reflects the price development of 50 publicly traded companies in traditional industrial sectors that follow the MDAX-listed stocks in terms of market capitalisation and stock exchange turnover.

In order to measure the price development of durable consumer goods such as vehicles and furniture, the corresponding components of the consumer price index are used by destatis (Federal Statistical Office). The relative weighting is based on the respective weight in the consumer price index.

The price development of collectors' and speculative items is measured equally by the four representative goods categories jewellery, artworks, historical automobiles and precious wines. Jewellery prices are measured using the "Schmuck aus Edelmetallen" component of the consumer price index. The Artprice Global Index from Artprice.com is used to track price developments on the art market. This price index is based on auction prices for paintings, sculptures, drawings, photographs, prints, aquarelles and similar items. The HAGI Top Index of the Historic Automobile Group International (HAGI) is used to measure the prices of historic automobiles. The index tracks the price development of 50 rare historical automobile types based on a database of transactions covering more than 18,000 individual vehicles. Quarterly values prior to 2009 are based on an equally weighted recalculation interpolating during the year. The price development of precious wines is measured with the Liv-ex Fine Wine 100 published by the trading platform Liv-ex Ltd. The index measures the price development of the premium segment of the wine market for wines for which a secondary market exists. The index primarily includes Bordeaux wines, but also wines from the wine growing regions of Burgundy, Rhône, Champagne and Italy.

Since saving/sight deposits are not subject to a price directly, they are assumed not to show any price changes and are therefore modeled by a constant time series. This category includes, inter alia, current, savings, fixed-term and call money accounts, balances on building savings and non-governmental pension contracts and claims on other households.

The price development of shares is recorded by various share price indices. Using data from the Coordinated Portfolio Investment Survey (CPIS) of the International Monetary Fund (IMF), the geographical weighting of German equity investments is determined and, based on this, MSCI price indices are weighted accordingly.

Similar to the procedure for equity investments, the geographical distribution of bond investments is determined using data from the IMF and the Bank for International Settlements (BIS). The price development is calculated using the corresponding bond price indices from Barclays Bank PLC. Both government and corporate bonds with different credit ratings and residual maturities are taken into account.

Other financial assets, which are not covered by the three previous categories, are measured by the development of gold and commodity prices. The Rogers International Commodity Index is used for the price development of commodities, which reflects the price development of futures on various commodities. The price of gold is determined via the London Bullion Market.

The capital, which is bundled in insurance contracts and funds, is allocated on the basis of data provided by the German Insurance Association (GDV) and the Federal Association for Investment and Asset Management (BVI).

In the case of time series with daily values, the average end-of-day index status of the last quarter month is always used. For indices available monthly, the last monthly value in the quarter is used.

Revision of historical data of the underlying time series may result in a deviation of the historical index values from previous publications.

Publication dates

The index values of a quarter are published as follows:

First quarter: 15 May
Second quarter: 15 August
Third quarter: 15 November
Fourth quarter: 15 February of the following year

If the date falls on a weekend or a public holiday, publication will take place on the next working day.

List of data sources

Art Market Research Developments Ltd.
Bank für Internationalen Zahlungsausgleich (BIZ)
Barclays Bank PLC
Bundesverband Investment und Asset
Management (BVI)
Deutsche Bundesbank
destatis – Statistisches Bundesamt
Gesamtverband der Deutschen Versicherungswirtschaft (GDV) e.V.
Historic Automobile Group International (HAGI)
Internationaler Währungsfonds (IWF)
Liv-ex Ltd
vdpResearch GmbH