FvS Wealth Price Index for Germany

Q3-2023: Interest rates and weak growth depress asset prices

At the end of the third quarter, asset prices for private German households fell by 2.9%. Asset prices in Germany thus fell for the fifth time in a row compared to the same quarter of the previous year. The development of the wealth price index in the third quarter was again characterized by the macroeconomic environment of high interest rates, high but already declining consumer price inflation and concerns about upcoming weak growth.

In a long-term comparison with 2010, when the central banks of Western industrialized nations had not yet launched their expansionary monetary policies, asset prices have risen by +68 %. This is primarily due to an increase in the price of real assets (+95 %), while financial assets only increased in price by +7 %. By comparison, consumer prices rose by +26 % over the period. As asset prices have only corrected by 5 % since their peak in mid-2022, the markets for assets still bear significant potential for deflation in the course of a further reduction in the money supply.

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

At the end of the second quarter, real assets (real estate, business wealth, consumer durables and collectibles & speculative goods) owned by German households were trading -4.1 % lower than in the same quarter of the previous year.

Prices for financial assets (savings and sight deposits, shares, bonds and other financial assets) owned by private households rose by +1.8% compared to the same quarter of the previous year. The period of the past four quarters was initially characterized by a slight price recovery, before prices eased again slightly in the most recent quarter.

Real assets: Real estate prices keep falling

Prices for real estate owned by private German households were trading -6.5% lower at the end of the third quarter than in the same quarter of the previous year. Since the all-time high on the real estate market in mid-2022, real estate prices (as measured by the vdpResearch price indices) have fallen continuously.¹ While the price trend on the real estate market still gave the impression that prices would stabilize in the middle of the year, the price decline in the third quarter was again more pronounced, meaning that stabilization does not appear to be in sight.

The reasons for the fall in prices on the real estate market can be traced back to various factors. The largest share of the development is due to the rise in mortgage interest rates, as the increased interest rates have made financing a property massively more expensive. While mortgages could still be taken out at an interest rate of one percent in 2021, interest rates of over four percent now have to be paid for a comparable loan. In addition, the requirements for energy-efficient refurbishment have increased, which has caused the value of properties in need of refurbishment to fall. At the same time, prices for construction, maintenance and renovation have risen. All in all, buying a property is significantly more expensive for private households than it was five or ten years ago.²

Coupled with the uncertain economic situation and the associated uncertainty about the future income of private households, a further price correction potential seems quite plausible. However, this is counteracted by the short supply of real estate that has existed for years and the significant decline in construction activity.

Prices for business wealth (privately owned companies) have recovered from the price slump of 2022 and were trading at +12.7 % higher at the end of the third quarter than at the end of the same quarter of the previous year. The reason for the price recovery is to be found in the declining consumer price inflation and the reaction of the central banks. At the same time, however, the economic outlook deteriorated during the third quarter of 2023, causing prices for business wealth to fall slightly again recently.

Durable consumer goods increased in price by +4.8% compared to the same quarter of the previous year. In particular, prices for consumer vehicles, furniture, lighting, appliances and other household accessories have risen significantly. The reason for the price increase can be found in the higher prices for labor, energy and primary products as well as in high monetary consumer demand. At the same time, however, price increases have slowed somewhat after reaching record levels in the previous year.

Prices for collective and speculative goods rose by +6.2% compared to the same quarter of the previous year. Different developments were observed within the category. While art objects rose in price by +22.8%, there was only a slight price increase for precious wines (+1.4%) and jewelry made of precious metals (+1.2%), while prices for historic automobiles fell slightly (-0.8%).

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 price decline on the German real estate market of -15.9 % 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.

² Cp. Immenkötter (2023): „Sind Immobilien heute erschwinglicher als früher?“, Flossbach von Storch Research Institute.

Financial assets: Price correction for bonds

At the end of the quarter, prices for private households' equity assets were +12.1% higher than in the same quarter of the previous year. Starting in the third quarter of 2022, share prices recovered from the price slump of the previous months, which was due to the emergence of consumer price inflation and the associated rise in interest rates and fears of recession. The recovery in share prices continued until mid-2023. In the most recent third quarter of 2023, share prices finally fell again slightly compared to the previous quarter due to growing concerns about recession. The price recovery was most pronounced for shares in German and European stocks, which had fallen sharply in the previous year.

Prices for bonds owned by private German households fell by -4.1% compared to the same quarter of the previous year. The reason for the fall in prices continues to be the existing high consumer price inflation, which is often higher than the interest rate to maturity on bonds and has pushed bond prices down further due to a negative real interest rate. Prices for bonds from German issuers fell particularly sharply in an international comparison, while the fall in prices for bonds issued by other European countries and North America was somewhat milder.

The price of other financial assets, which is measured by the price of gold and commodities traded on the stock exchange, rose by +1.1% compared to the same quarter of the previous year. The price of gold rose by +5.7 % year-on-year, while prices on the commodities markets fell by -3.9 %.

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

By net wealth: Price decline among the upper middle class due to real estate

Asset price inflation is between -0.4% and -4.2% for the cross-section of net assets of private German households. The greatest fall in prices can be observed among households with high real estate assets, as is often the case in the upper middle class. Although the wealthiest households (-1.9%) also have high real estate assets, which are suffering from the price declines, the recovery in prices for business wealth is partially offsetting the fall in prices. At -0.4%, households in the lower middle class show a barely noticeable fall in asset prices, as they very rarely own real estate and business wealth.

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), the price decline increases with age, as the share of real estate in total assets also increases with the age of the reference person. The youngest households experience a price decline of -1.6 % of their assets, while households over retirement age suffer a price decline of -3.5 % or more.

Price indices in comparison: Consumer price inflation eases

Consumer prices, as measured by the Federal Statistical Office's consumer price index, have risen by +5.7% over the past four quarters. The most recent quarter only accounted for a price increase of +0.8%, which is the lowest quarterly price increase since Q4 2020. Producer prices fell year-on-year for the first time since Q4 2020 (-11.2 %).