FvS Wealth Price Index for Germany

Q4-2020: Monetary and fiscal policy drive inflation

In 2020, prices for assets owned by private German households rose by +6.3%. Although the pandemic and its containment measures still caused prices to dip in the first quarter, despite the recession the demand for assets was high for the rest of the year. A large proportion of real and financial assets closed the year with price gains. While asset prices had already risen in recent years because of the European Central Bank's monetary policy measures, such as asset purchase programs and interest rate cuts, fiscal policy measures such as economic stimulus also boosted demand for assets in 2020.

A look at the two main categories of assets held by German households (real and financial assets) shows that real assets were high in demand and have risen in price by +7.7% since the beginning of the year. Real assets account for 79% of the total household wealth in Germany, so that this component dominates the development of the overall index. The remaining 21% of German households' assets consist of financial assets, which at +0.4% are only slightly above the price level recorded at the end of the previous year.

While at the beginning of the pandemic concerns were raised that German real estate prices would collapse, the opposite has proven to be the case. German real estate asset prices have risen by +7.0% year-on-year. The price rally, which has already been in full swing since 2012, continued. Residential property prices have risen significantly (+7.5%). The demand for housing has increased because of more people working from home, but also because of further declines in the cost of real estate loans. At the same time, institutional investors are lacking attractive fixed-income investment opportunities due to the fall in interest rates. This increased the demand for residential real estate as investment opportunity. By contrast, commercial property prices are stagnating (+0.6%). Due to the containment measures, stores remained closed at times and more office work was done from home. This created a so-called doughnut effect in major urban areas. Prices rose more sharply in peripheral areas than in the city centres.

In the first quarter of 2020, prices for business wealth, i.e. companies owned by private German households, tumbled due to the uncertain earnings outlook. Prices subsequently recovered quickly thanks to economic stimulus packages. By mid-year, the prices were already back at their pre-Covid 19 level. In the second half of the year, the support from fiscal policy prevented a wave of insolvencies. Prices for business wealth continued to rise, ending the year +14.3% higher than at the end of the previous year. Prices for business wealth are measured using the prices of small and medium-sized publicly traded companies.

Consumer durables became -0.6% cheaper in 2020. This is due to price reductions by suppliers, as German households bought fewer consumer durables such as cars or furniture due to uncertainty about their future income. For example, according to the Kraftfahrtbundsamt (Federal Motor Transport Authority), the number of cars sold in Germany fell by -19.1% year-on-year.

Collectibles and speculative items recorded a price decline of -4.1% in comparison to the end of the previous year. Within the category, prices for art objects fell particularly sharply (-16.4%). Art auctions and art fairs were cancelled, and private art sales increased, where lower prices could be achieved. Lockdowns also made it more difficult for art dealers to acquire and ship objects. Prices for precious wines also suffered from similar circumstances, as restaurants and retailers were temporarily closed, and slipped -2.5%. Prices for historic automobiles fell sharply in the first quarter but then recovered quickly, ending the year at the same price level as at the beginning of the year (+0.5%). A significant price increase for rare models manufactured by Ferrari and Porsche at the end of the year was the main factor behind the price rise. Jewellery made of precious metals increased in price by +4.2%, which can be explained by the higher prices for metals.

The price of total financial assets held by German households was slightly up at the end of the year (+0.4%). Both fiscal and monetary policy measures to combat the economic consequences of the pandemic are decisive for the price development.

While prices for equity investments held by German households fell sharply in the first quarter of 2020, they subsequently recovered quickly and were only -0.7% lower year-on-year. 80% of German equity holdings are invested in German and European companies, which were trading at lower prices at the end of the year than at the beginning. On the US stock market, where the price of technology stocks dominated the market, significant price gains were recorded, but only around 14% of German equity assets are invested there.

The fixed-income investments of private German households became more expensive by +1.5%. Fixed-income securities invested in Germany increased by +1.1%, and fixed-income investments in North America even rose by +4.9%. The reason for the price increases were asset purchase programs cuts in key interest rates in Europe and the USA.

The price of other financial assets is measured via the prices of gold and commodities and increased by +6.9% over the course of the year. Gold also proved to be a crisis metal in 2020, rising by +14.4% over the course of the year. Commodities have become 6.3% cheaper due to lower demand.

In the cross-section of net wealth, asset price inflation ranges between +1.8% and +7.2%. The higher the household's share of business wealth and real estate, the higher the asset price inflation. The assets of the wealthiest households, among which successful entrepreneurial families are most frequently found, consist on average of 20% business wealth and 62% real estate. As a result, the highest increase in asset prices is to be found here, at +7.2%. Lower-middle-class households, which rarely own real estate or businesses and at the same time have a proportionately high level of saving deposits, experience the lowest price increase, at +1.8%.

In the cross-section of household age (measured by the age of the household's reference person), the highest asset price inflation is found among households aged 45-54, as these households have the largest share of business wealth. The share of real estate increases with household age, providing steady rates of asset price inflation for older households. At the same time, households beyond retirement age are less likely to own business wealth, which causes asset price inflation to be lower for those households. The range of asset price inflation across all age categories is less than two percentage points.

Consumer prices stagnated during the year (-0.2%). The reason for this is a drop in demand, as uncertainty about future income has caused households to shift or cut back on consumer spending. In addition, closed stores and an increase in online retailing make price measurements more challenging in 2020. Prices for clothing and footwear, telephones and communication equipment, goods and services for vehicles, and package holidays fell particularly sharply. Producer prices fell by -1.3% compared with the end of the previous year.

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%).

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 2014. 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 (2016). The weighting scheme of the time series is based on the survey results of the 2014 PHF study and corresponds to the share of assets in the total assets of German households. The composition of household assets in the population cross-section according to 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 tracked by the vdp-Immobilienpreisindizes (real estate price indices) by vdpResearch GmbH. The index "Wohnen" (residential) reflects the change in prices for owner-occupied residential property, while the price change for other properties is covered by the index "Gesamt" (total). Since the "Gesamt" index is available only from 2008 onwards, quarterly values before 2008 are approximated using average annual growth. The two indices are weighted according to the distribution of household wealth. Both price indices are based on a transaction database that represents almost 90 percent of the turnover of the German real estate market.

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

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