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FvS Wealth Price Index for Germany

Q2-2019: Asset prices still above consumer prices

Even though asset price inflation at the end of the second quarter of 2019 was only +2.7% and hence significantly lower than in previous years, it remains well above consumer price inflation, which is only 1.6% compared with the same quarter of the previous year.

Since Q1-2015, asset prices have risen by 22.6%, consumer prices by only 6.4% and nominal GDP by only 14.6%. Those who set aside one euro for wealth accumulation at the beginning of 2015 will be able to buy consumer goods worth 1.15 euros at the end of the second quarter of 2019. By contrast, anyone who deposits one euro into an interest-free current account or stores it in cash can only buy consumer goods worth 94 cents. Those who received a salary in the same period whose growth corresponds to that of the nominal gross domestic product can now afford consumer goods in the amount of 1.08 euros. By comparison, the purchasing power of the wealth owner has risen significantly more than that of the other two groups. The disproportionate increase in the purchasing power of assets reflects the decline in interest rates during this period. Falling interest rates are the main driver of rising asset prices.

If the assets of German households are divided into real assets and financial assets, a price increase of +3.4% for real assets and a slight price decline of -0.2% for financial assets is recorded. Due to the higher weight of real assets in the overall index (79%), their price development is decisive.

The ongoing rise in real estate prices and declining prices for business wealth are the main drivers of real assets. At +6.6%, real estate again became considerably more expensive year-on-year, albeit not quite as strongly as in previous quarters. A scarce supply of real estate combined with very favorable financing conditions continues to result in rising prices. Despite the price recovery at the beginning of the year, prices for business wealth were -12.8% lower than in the previous year. Prices for business wealth thus fell by more than 10% year-on-year for three consecutive quarters. Durable consumer goods are becoming more expensive by +0.9% and collectibles and speculative items fell slightly in price by -0.4%. In detail, while prices for historic automobiles and precious wines are falling, prices for art objects and jewellery made of precious metals are rising.

Within financial assets, there are different price movements. Shares are -3.4% cheaper than in the second quarter of 2018. Despite the recovery on the stock market in spring 2019, prices are still below the previous year's levels. Bonds have become more expensive compared to the same quarter of the previous year due to the renewed fall in interest rates and are now quoted at +2.7% higher. Other financial assets (measured by gold and commodity prices) show the largest price increase within financial assets. The price of gold in particular is responsible for the high price increase, while commodity prices have fallen. By definition, the price of savings deposits remains unchanged.

In the cross-section of net assets, asset price inflation is highest for the poorest households and most of the middle class. The price growth rates for these households’ assets range between +3.5% and +4.6%. By contrast, the wealthiest households and the lower middle class show significantly lower price growth rates of +1.5% and +1.6%, respectively. The reason for the differences is the relative share of savings deposits, business wealth and real estate. While the lower middle class has the largest share of savings deposits and thus has a low inflation rate, the high share of business wealth is decisive for the wealthiest households.

Looking at inflation rates in the cross-section of household age (measured by the age of the reference person), the range varies from +1.3% to +4.3%. Middle-aged households (45-54 years) have the lowest rate of price increase at +1.3%, as they have the highest proportion of business wealth. Among the oldest households (75+ years), asset prices rose most sharply (+4.3%) due to the highest share of real estate in their total assets.

At +1.6%, consumer price inflation is roughly at the level of the past three years and remains well below asset price inflation. At +1.8%, the price increase of producer prices is similarly low.

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 Thomson Reuters Continuous 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