FvS Wealth Price Index for Germany

Q2-2023: Asset prices fall

At mid-year, asset price inflation in Germany stands at -3.3 %. For the fourth time in a row, asset prices of German private households have fallen compared to the same quarter of the previous year. The price decline remains at the highest level since the financial crisis. However, the price decline has lost momentum, with prices moving sideways at -0.1 % in the latest quarter Q2-2023.

The latest decline in the asset price index continues the trend reversal in asset markets that has put an end to the price rally that has been ongoing since 2014. The main reason for the trend reversal is the emergence of consumer price inflation, which is related to the monetary policy of the past decade, fiscal policy during the corona pandemic and the global economic consequences of the pandemic. Capital markets and central banks reacted to consumer price inflation by raising interest rates, which, with a certain time lag, led to a decline in the price of real estate, the most important asset of private households in Germany. Prices for business wealth and financial goods such as shares and bonds also suffered greatly from rising interest rates. However, as consumer price inflation eased in the first half of the year and fears of a severe recession have not materialised so far, asset prices stabilised in the most recent past quarter.

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: Real assets fall, financial assets rise

Real assets (real estate, business wealth, consumer durables and collective & speculative goods) owned by private German households were trading -4.3% cheaper at the end of the second quarter than in the same quarter of the previous year. One percentage point of the price decline is attributable to the second quarter of 2023.

After the sharp drop in prices in 2022, the price of the financial assets of private German households (savings and demand deposits, shares, bonds and other financial assets) has stabilised in the last three quarters. Compared to the middle of the previous year, a slight price increase of +0.8% was recorded.

Real assets: Real estate prices fall

After the all-time high on the German real estate market in the middle of last year, real estate prices (as measured by the vdpResearch price indices) have fallen continuously and are now trading -5.7% cheaper than in the middle of last year.¹ However, at -1.0%, the price decline within the most recent second quarter was smaller than in the two previous quarters (-2.1% in Q1-2023 and 1.9% in Q4-2022). The weakening dynamics indicate a stabilisation of the price level.

Looking at the price development on the real estate market over five years, a price increase of just under 30% is still apparent, and over ten years the price increase is even almost 75%.

The reasons for the fall in prices on the real estate market can be found in the rising costs of financing and maintaining a property. On the one hand, interest rates for mortgage loans have risen massively since 2021. While in 2021 home loans could still be arranged with an interest rate of one per cent, buyers now have to bear interest rates of four per cent. At the same time, prices for construction, maintenance and renovation have also risen. From the government side, too, it is to be expected that energy refurbishment requirements will continue to rise, further reducing buyers' willingness to pay. Concerns about a recession are also limiting buyers' willingness to take risks.

Due to the rise in costs, new construction activity has collapsed drastically within the past four quarters, so that the supply of real estate has expanded only insufficiently. The excess demand, which has already been expanded over the past few years by the movement into metropolitan regions, the immigration of refugees and the preference for more living space, has increased further. This has prevented real estate prices from falling more than could have been expected given the changed environment.

Prices for business wealth (privately owned companies) have stabilised further after falling sharply in the previous year. At +2.5 %, the prices for business wealth of private German households are now already above the level of the middle of the previous year. While last year's price decline was due to increased consumer price inflation, geopolitical conflicts and high energy prices, business wealth prices stabilised again as concerns about a resulting deep recession did not materialise.

Consumer durables continued to increase in price by +5.5 % compared to the middle of the previous year. However, the inflation rate is clearly below the increase of the previous quarters. For example, at around six per cent, the inflation rate for consumer durables was well below last year's rate of just under ten per cent. While supply chain problems and high prices for intermediate products and energy costs were still driving up prices last year, the problem situation is increasingly improving.

The highest price increase among all assets is to be found in collectibles and speculative items, which continue to enjoy high demand. They were traded at +10.4 % more expensive than in the middle of the previous year. The price increase was particularly strong for art objects, which rose in price by around 30 per cent compared to the same quarter last year. The reason for the strong price increase continues to be catch-up effects from the corona pandemic. At the same time, price growth already slowed somewhat in the second quarter of 2023. Other goods in the category, such as historic automobiles, only increased in price by just under five percent and precious wines by just one percent.

¹ The GREIX offers an alternative for measuring price change in the German real estate market, but so far only takes into account 18 German cities, which comprise less than one fifth of the German population, and is therefore not suitable for measuring the price change in the assets of all German households. For the same period, the GREIX shows a price decline for condominiums of -9.9% (compared to -4.1% for vdpResearch) and for single-family houses -10.5% (compared to -3.7% for vdpResearch).

Financial assets: Bond asset prices stabilise

The prices for bond assets owned by private German households stabilised in the past quarters, after a historic price decline was still recorded on the bond markets in the previous year. Compared to the middle of the previous year, the price of bonds was still -4.8% below the previous year's level. Within the most recent quarter, prices stagnated. Since more than two-thirds of German households' bond assets are invested in securities of German issuers, their price development of 5.1 % sets the trend for total bond assets. The remaining bond assets, which are almost exclusively invested in Europe and North America, suffered a price drop of around four percent. The driving force behind the price development on the bond markets is consumer price inflation, which eased in Europe and North America in the most recent quarters and ensured a stabilisation of the bond markets.

Prices for the share assets of private households have risen in three of the last four quarters and have thus recovered from the price decline in 2022. At mid-year, the price of equity assets was +9.6 % above the previous year's prices. The price recovery was particularly marked for German, European and North American equities. The reason for the recovery is the slowdown in consumer price inflation and the fact that fears of a strong recession have not materialised so far. On the other hand, shares from the emerging and frontier markets suffered price setbacks, some of which were considerable.

The price of other financial assets, which is measured by the prices of gold and commodities traded on the stock exchange, fell by -7.4% compared to the same quarter of the previous year. There was a price correction of -18.7% on the commodity markets, after commodity prices had risen by 70% in some cases within one year in previous years. Gold was +3.4% more expensive in the middle of the year than in the middle of the previous year.

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

By net wealth: Highest price decline among wealthiest households

A look at the cross-section of the net wealth of private German households shows that households with a high ratio of savings and demand deposits, as most often found in the lower middle class, suffer the smallest price decline of -0.4%. These households are less likely to have assets such as business wealth or real estate that have fallen in price. Households in the upper middle class have suffered the greatest price decline at -3.9%, as they have the highest proportion of real estate assets.

By household age: Biggest price drop for retired households

In the cross-section of household age (measured by the age of the household reference person), asset price inflation spans the narrow interval of -2.6% to -3.6%. The lowest price decline is found among the youngest households, as they have the smallest share of real estate. Households beyond retirement age, on the other hand, have the highest proportion of real estate assets and therefore also suffer the strongest price decline of all age groups.

Comparison with producer and consumer prices: Consumer price inflation eases

Consumer prices, measured by the consumer price index of the Federal Statistical Office, have risen by +6.5 % over the past four quarters. An increase of +1.2 % is attributable to the most recent quarter. Producer prices rose by only +1.8 % in the same period. After producer prices rose massively in the second half of 2022, they fell in the first two quarters of this year.

Update of weighing and indexation to the year 2021

The weighing of the asset price index was updated for the first time to the year 2021 with this publication. Until the previous publication (Q1-2023), the weighing was based on the year 2017. The update was carried out on the basis of the study "Private Haushalte und Ihre Finanzen" (Private Households and Their Finances) published by the Deutsche Bundesbank² in April 2023 with the help of other data sources (Bundesverband Investment und Asset Management (BVI), Gesamtverband der Deutschen Versicherungswirtschaft (GDV) e.V., International Monetary Fund (IMF)), which also refer to the year 2021.

Based on the statistics evaluated, the asset composition of private German households has not changed structurally. Real estate continues to flow into the index with a weight of 63.7 %. There are also only minor changes in the other components, which have no substantial influence on the index.

Table A: Comparison of the new and old weighing of the asset price index

Source: PHF-Studies Bundesbank (2023, 2019), BVI, IWF, GDV, Calculations Flossbach von Storch Research Institute.

² Deutsche Bundesbank, Monatsbericht April 2023, p. 25-58.

The indexation of the time series was set to the year 2021 with the weighing. Index components that grow or fall strongly after the year of indexation receive an increasingly larger or smaller effect on the overall index due to the geometric linking of the growth rates. The regular updating of the indexation counteracts this bias.

Under the new indexation and weighing, the change in the asset price index for the first quarter of 2023 is -3.3 per cent. With the old weighing and indexation, the value would be -3.4%. The record value of +12.1% from Q3-2021 is now +11.4% under the new weighing and indexation. The differences arise from the effect described above.