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 %).

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 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