FvS Wealth Price Index for Germany

Q4-2018: Price erosion in the fourth quarter

Although the asset price index rose by 0.9 % in 2018, in the fourth quarter prices for the assets owned by German households fell by 2.7 %. Falling prices for business and financial assets were the main reasons for this development. The wealthiest households and households shortly before retirement suffered a slight fall in the asset prices due to a high proportion of business wealth. For the first time since 2012, consumer price inflation has again exceeded asset price inflation.

At +0.9% year-on-year, asset price inflation as measured by the FvS Wealth Price Index is significantly lower than in the recent past. This is mainly due to the fourth quarter of 2018, when asset prices fell by 2.7 %. Previously, asset prices had risen for twelve consecutive quarters.

Prices for real assets of German households rose by +1.9% in 2018. Previously, they were always the driver of high inflation. Financial assets are now recording the fourth consecutive fall in prices and are becoming 3.8 % cheaper year-on-year.

There are different price developments within real assets. Real estate is following its long-term upward trend and is 7.9% more expensive than in the previous year. By contrast, the price of business wealth fell by 18.4% in the same period. Durable consumer goods are becoming 1.1 % more expensive and collectibles and speculative goods are stagnating.

Within financial assets, shares in particular suffer a significant fall in prices. The price of shares held by German households fell by 13.7 % compared with the same quarter of the previous year. Bonds are also suffering a price decline, falling by 2.1 %. As a result, bonds have now become cheaper for eight consecutive quarters. The other financial assets of German households (measured by gold and commodity prices) have risen by 1.8 %. By definition, the price of savings deposits remains unchanged.

At the end of the fourth quarter, the cross-section of net wealth of German households' assets presents a different picture than in previous years. Due to their high proportion of business wealth and shares, the price of the wealthiest households' assets fell by 1.3 %. The last time that the wealthiest households suffered a fall in asset prices occurred in Q2-2012. Since then, the wealth of the wealthiest households have always recorded inflation rates between three and twelve per cent. The middle class and the poorest households lie close together with inflation rates between 3.8% and 4.6%. Only households in the lower middle class experience a lower price increase of +0.9 %. The main reasons for this are the high proportion of savings deposits and the relatively low real estate holdings of lower middle class households.

The picture has also changed in the cross-section of household age (measured by the age of the reference person). The link between age and inflation rate is now U-shaped, whereas before it was hump-shaped. The lowest inflation rate is found among households close to retirement. Their assets fell by 1.0% compared to the same quarter of the previous year due to the proportionately high level of business wealth. In the previous quarters, these were in most cases the households with the highest inflation rates. All other household groups show higher price growth rates. The youngest households (25-34 years) are subject to an inflation rate of 3.1%. At the other end of the age scale (75 years and older), the households with the highest inflation rate are found. Due to their high proportion of real estate, the price increase for the oldest households is +4.4% year-on-year.

For the first time in a long while, consumer price inflation is greater than asset price inflation. At 2.2% year-on-year, consumer price inflation has picked up considerably. Looking at the development of asset and consumer prices in a long-term comparison, asset prices have risen much more sharply. Since the last local peak in asset prices in mid-2007, asset prices have risen by 36.4%. During the same period, consumer prices rose by 17.3%.

Producer prices rose by 3.1 % in 2018. Thus, both consumer and producer price inflation are above asset price inflation. The last time this was the case was in Q2-2012, when asset price inflation also remained at a low level.

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