FvS Wealth Price Index for Germany

Q3-2022: First price erosion in 13 years

Asset prices for German private households fell for the first time in 13 years. At the end of the third quarter of 2022, asset prices for private German households were -1.5% lower than in the prior-year quarter. The development was driven on the one hand by economic uncertainties, which caused a sharp fall in business asset prices, and on the other hand by the sharp rise in interest rates since the start of the year, which put an end to the price rally on the German real estate market.

The expansionary monetary policy of the European Central Bank since 2014 has expanded the money supply in the eurozone over a period of years and initially caused asset prices to rise. With the global economic and fiscal consequences of the Corona pandemic coupled with the warlike conflict in Ukraine, consumer price inflation has finally taken off. In order to counter consumer price inflation, central banks around the world have moved away from their expansionary monetary policies, which has led to a decline in asset prices. With German asset prices now falling for the first time since 2009, the trend reversal that had already been announced in the first quarter of this year has manifested itself.

A look at asset price inflation in a cross-section of the age and net wealth of private German households shows that the decline in asset prices mainly affects affluent and middle-aged households (45-54 years), as they have a high proportion of business wealth.

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.

Real assets (real estate, business wealth, consumer durables and collective & speculative items) owned by German households were -0.4% cheaper at the end of the third quarter than in the prior-year quarter. The price decline was particularly sharp in the third quarter of 2022, when prices for real assets fell by -2.0%. As 79.4% of the gross assets of private German households are attributable to their real assets, this has the greatest impact on the overall index.

The price of financial assets (savings and demand deposits, equities, bonds and other financial assets) held by German households fell by -6.7% year-on-year at the end of the third quarter. While the price of financial assets was still rising slightly in the fourth quarter of 2021, the price of financial assets fell in each of the first three quarters of 2022.

Although the prices of real estate owned by private German households rose by +5.7% year-on-year at the end of the third quarter, within the third quarter of 2022 the real estate market saw prices fall by -0.4%. The decline in prices now also marks a turnaround in real estate prices, after they had risen consistently for eleven years.

The economic and political conditions on the German real estate market already deteriorated visibly at the beginning of the year. The cost of real estate financing, which is based on the yields of long-term bonds with high credit ratings, rose rapidly in the course of 2022. In parallel, the cost of redevelopment has risen due to scarce resources and political requirements. Also, for many institutional investors, fixed-income securities, which are again yielding sufficiently high interest rates as a result of the departure from the low interest rate environment, represent attractive investment alternatives to real estate. However, this is countered by the fact that the supply of real estate is still scarce in many German regions and will remain so for the time being due to the stagnation in new construction activity.

In the first three of the past four quarters (Q4-2021 to Q2-2022), tight supply outweighed deteriorating conditions, with the result that there continued to be significant price increases on the German real estate market. In the most recent quarter, the picture turned and there was a slight decline in prices. Nevertheless, the price decline was significantly weaker than had been expected and discussed in the broad-based community. Possible reasons for this are that most price indicators, about which expectations are formed, are based on offer prices, but not on actual transaction prices. At the same time, the declining sales of the major German real estate financiers indicate that transaction volumes have also slumped significantly. On the one hand, sellers are still very reluctant to offer discounts and, on the other, buyers are waiting for prices to fall further, reflecting the increased cost of real estate financing and other rises in the cost of living.

The price of business wealth owned by private German households at the end of the third quarter of 2022 is -34.7% cheaper than at the same quarter a year earlier. The sharp drop in prices has occurred over the past three quarters, in each of which the price has fallen by between ten and 13%. The reasons for the decline in business wealth prices are high consumer price inflation and fears of falling sales and the threat of insolvencies. The fears are fueled by high energy and producer prices, bottlenecks in global supply chains, the armed conflict in Ukraine, and rising credit financing costs as a result of rising interest rates in the bond markets.

In contrast to the above real asset categories, prices for both consumer durables and collective and speculative items show significant price increases but play a minor role in the overall index due to their low weighting (3.5% and 0.5%, respectively).

Prices for consumer durables record fifth record price increase in a row. Compared with the prior-year quarter, prices for consumer durables rose by +8.3%. However, the price increase in the most recent quarter just ended (+1.7%) was somewhat lower than in the two preceding quarters (+2.6% in Q1 and +2.1% in Q2). Prices for consumer durables for leisure activities such as mobile homes, utility vehicles and household appliances rose particularly strongly. The price increase was driven in part by a supply shortage due to problems in global supply chains.

Collective and speculative items recorded the largest price increase within real assets and are now +14.8% more expensive than in the same quarter of the previous year. The price increase is strongest for historic automobiles, as they have increasingly come into focus as a store of value in times of rising consumer prices. Objects of art have also been sought-after investment items for wealthy households in recent quarters, resulting in record sums being realized in the major international auction houses so far in 2022. Precious wines did not lag behind in terms of price development and became significantly more expensive compared with the prior-year quarter. Prices for jewelry made of precious metals also rose, driven by the prices of primary products.

With a price decline of -15.5%, the bonds held by private German households suffered the highest price markdown since the index was launched. The price drop was caused by several increases in key interest rates by the ECB and the U.S. Federal Reserve in the period under review as part of the fight against high consumer price inflation, which resulted in large price markdowns on the bond markets. While the second quarter of 2022 saw the biggest drop in prices at 8.7%, prices fell by only -2.1% in the third quarter just ended. Prices of bonds from issuers in the emerging markets suffered most, with credit ratings also deteriorating sharply due to the uncertain economic situation. Prices for bonds from European and North American issuers also fell significantly. By contrast, bonds from the Pacific region largely withstood the turbulence and fell by only three percent compared with the prior-year quarter.

Prices for the equities of private German households have fallen by -15.6% within the last four quarters. Whereas in the fourth quarter of 2021, prices for equities were still rising slightly, the first and second quarters of 2022 saw price declines of between six and eight percent. In the latest third quarter of 2022, share prices fell again by -3.2%. While at the beginning of the year it was fears about rising consumer prices as well as monetary policy reactions and economic consequences that depressed prices on the stock markets, the fears were largely realized in the second and third quarters of the year, sending global stock markets further down. This was compounded for shares of European companies by the negative impact of the armed conflict between Russia and Ukraine and the political reactions of the European Union. Within equities, the price decline was most pronounced for securities of German issuers (-25.5 percent compared with the prior-year quarter), which fell by almost eight percent within the third quarter alone. In the case of equities issued by North American companies, the strong rise in the U.S. dollar in the third quarter made itself felt, as a result of which prices for North American equities actually recorded a positive increase of one percent compared with the prior-year quarter.

The majority of equities and bonds held by private German households are not direct investments in individual securities, but are part of the investment funds, capital-forming life insurance policies and private and company pension products held by households. As a result, there was also a significant fall in the price of these assets.

The highest price growth rate of all asset categories can be found in the price of other financial assets, which is measured via the prices of gold and commodities traded on stock exchanges. The price of other financial assets was +26.8% higher at the end of the third quarter than at the end of the prior-year quarter. The price of commodities in particular contributed to this with a growth rate of +49.7%, which resulted from the price increase of commodities at the beginning of the year. In the third quarter just ended, however, prices for raw materials fell by almost six percent. The price of gold at the end of the third quarter was +12.3% higher than 12 months ago, having fallen in each of the last two quarters.

By definition, the prices of savings and demand deposits remain unchanged.

A look at the cross-section of net assets of private German households shows that only those households with a high proportion of business wealth suffered a decline in their asset prices. This is primarily the case among the wealthiest households, which saw their asset prices fall by -4.4% year-on-year, a level not seen in Germany for 13 years.

Looking at the remaining households in cross-section of their net assets, year-on-year asset price inflation for them is both positive and homogeneous. Asset price inflation across household categories ranges from +1.2% to +2.9%, with the highest value observed for the poorest households. This is due to the fact that consumer durables and savings and demand deposits account for a relatively large share of total wealth, and the negative trend in business wealth is less significant.

However, looking only at the past third quarter of 2022, all household types show price declines ranging from -0.3% to -2.7%. The weakest price decline can be found among households in the lower middle class, as they have the highest proportion of savings assets, while the wealthiest households show the strongest price decline due to the high proportion of business wealth.

In the cross-section of household ages (measured by the age of the household reference person), asset price inflation is negative for all households before retirement age, ranging from -0.3% to -5.0%. The largest negative value is found for middle-aged households (45-54 years), as they have the proportionally largest business wealth. Only households of retirement age (65 and older) can report a positive increase in asset prices, as they very rarely have business wealth and real estate is more common.

Looking only at the price trend in the most recent quarter, households in all age categories show a decline in the price of their assets, ranging from -1.1% to -2.7% for the third quarter.

Over the past four quarters, producer prices for industrial products have risen by +43.1%. The price increase was particularly pronounced in the most recent third quarter, at +12.8%. The price increase was driven by higher prices for natural gas and electric power, which more than doubled compared with the prior-year quarter. The reason for the high gas price is the political consequences of the armed conflict in Ukraine.

Consumer price inflation as measured by the consumer price index was +8.4% at the end of the third quarter compared with the prior-year quarter, exceeding the figures for the previous quarters. Prices for energy products and food in particular rose sharply.

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 2017. 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 (2019). 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 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 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

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