ECONOMIC POLICY NOTE 30/7/2015 Wealth prices in Euroland: The North-South Divide THOMAS MAYER and CHRISTOPHER THIEM Our new series of wealth prices for EMU member countries reveal a deep north-south divide within the euro area. Divergent wealth prices reinforce real economic divergence in the euro area and increase the difficulties in designing the common monetary policy. Whether EMU will survive in the long-run will therefore depend to a significant degree on the chances for convergence and divergence of asset prices and economic growth. Recently, we introduced a wealth price index for Germany 1. In the present paper, we extend the analysis for Germany to other key euro area countries. Our data reveal a deep northsouth divide in wealth price developments. Divergent wealth prices reinforce real economic divergence and increase the difficulties in designing the common monetary policy. Whether EMU will survive in the longrun will therefore depend to a significant degree on the chances for convergence and divergence of asset prices and economic growth. In the following section of this paper, we discuss the conceptual issues for the construction of a wealth price index and review the sources for the price data and wealth composition. Then, we present the results of our exercise. In the final section, we draw some conclusions from our analysis for future economic and policy developments. Conceptual issues and data sources wealth of private households in key euro area countries. We include Austria, Belgium, Finland, France, Germany, Greece, Italy, Netherlands, Portugal, and Spain in our country sample. The indices are calculated as the weighted averages of price developments of real and financial assets owned by the households. 2 Real assets include real estate, business wealth, durable consumer goods as well as collectors items and objects for speculation. Financial assets consist of stocks, bonds, savings and sight deposits as well as other financial instruments (gold and commodity holdings). The sources for the wealth allocations of private households and the asset price series used to calculate the wealth price indices are given in an appendix table. As can be seen from Chart 1, real estate accounts for the largest share in private household wealth in all euro area countries. Other sizeable assets classes are business wealth and cash holdings. The Flossbach von Storch (FvS) wealth price indices measure the price development of the 1 See http://www.fvs-ri.com/fvsvermoegenspreisindex/ueberblick.html. 2 We use wealth prices and not asset valuation indicators and we exclude asset returns, such as interest, dividends or rental yields. For real asset prices, such as real estate or consumer durables, we use data adjusted for quality changes. Thus, our wealth price indices correspond conceptually to consumer price indices.
Chart 1: Private household wealth by asset classes (2010) % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 55.6% 63.5% 69.0% 65.1% 61.7% 67.8% 70.9% 76.3% 77.2% 83.7% 22.9% 4.3% 8.1% 13.0% 2.2% 9.4% 12.6% 7.4% 10.8% 3.3% 11.9% 8.4% 11.9% 11.6% 8.8% 7.8% 6.2% 8.3% 8.1% 4.4% 2.6% 1.4% 4.7% 3.9% 3.0% 4.5% 6.3% 4.6% 4.9% 8.9% 2.9% 2.3% 3.8% 5.5% 1.4% 4.6% 3.7% 3.5% 5.5% 3.3% 2.0% 3.8% 3.8% 5.3% 1.7% 4.0% Collector's items Other financial assets Shares Consumer durables Bonds Cash holdings Business wealth Real estate Source: ECB, FvS Research Institute; see appendix for detailed information. Chart 2: FvS wealth price index, harmonized consumer- and producer price indices 160 140 130 120 90 80 70 Source: ECB, FvS Research Institute; see appendix for detailed information. Wealth price developments in the euro area For the entire sample of our euro area countries, wealth prices have increased only modestly since 2005. Between that year and 2014, the aggregate wealth price index grew HPPI - Euro Area HCPI - Euro Area FvS WPI at an annual average rate of 1.2%, less than the rise of harmonized consumer prices by 1.8% and of harmonized producer prices by 1.9% (Chart 2). The key reason for the moderate development of aggregate wealth prices was the steady development of real 2
estate prices at the aggregate euro area level, which enter the index with the largest weight (Chart 3). The sharp increase in the prices for collectors items was of little consequence, given the small weight of this series in the aggregate index. However, developments were significantly different among individual euro area countries. As can be seen from Chart 4, wealth prices initially followed a broadly similar pattern in all euro area countries. But prices began to diverge as of 2010, the year in which Chart 3: Price developments by asset class 300 250 200 50 Collector's items Other financial assets Business wealth Shares Bonds Real estate Cash holdings Consumer durables Chart 4: Wealth prices by country 160 140 130 120 90 80 70 Austria Belgium Germany France Finland Netherlands Italy Spain Portugal Greece 3
Table 1: Wealth price indices between 2009Q4 and 2014Q4 Country Austria Belgium Finland France Germany Greece Italy Netherlands Portugal Spain 2009Q4 119.9 115.4 111.7 107.8 103.2 112.3 105.1 104.0 94.3 105.4 2010Q1 122.4 117.0 114.4 109.7 103.5 109.1 104.0 104.5 93.3 104.6 2010Q2 126.5 119.4 116.1 112.7 106.4 106.9 104.5 105.9 92.9 104.0 2010Q3 122.7 119.1 117.8 112.4 106.1 103.5 103.1 105.0 92.2 101.9 2010Q4 127.8 121.0 118.1 115.7 108.2 102.8 103.5 105.1 91.7 102.5 2011Q1 130.3 122.5 120.2 117.8.4 102.2 103.3 104.9 90.4.8 2011Q2 130.0 123.0 121.8 120.0 111.2.7 103.1 104.9 88.0.3 2011Q3 130.5 123.9 119.2 120.6 111.8 98.6 101.4 104.1 86.2 98.1 2011Q4 126.9 122.2 117.1 117.1 108.8 94.4 99.5 101.8 82.8 95.3 2012Q1 132.0 124.0 119.2 117.7.0 90.7 98.3 101.6 81.7 93.1 2012Q2 135.4 125.3 119.4 118.1 111.7 89.0 97.5 101.0 81.7 90.3 2012Q3 136.0 126.2 117.0 117.4 111.7 86.4 96.2 98.3 79.4 87.8 2012Q4 138.9 127.6 119.6 117.6 113.8 84.9 96.5 98.3 79.4 87.3 2013Q1 141.8 128.5 119.5 119.3 116.2 82.8 95.9 97.0 81.8 87.7 2013Q2 142.9 128.8 118.0 118.2 116.4 80.4 95.3 95.5 81.4 86.9 2013Q3 143.2 128.5 117.3 119.3 117.8 78.8 94.9 95.8 81.5 87.4 2013Q4 147.7 129.6 117.8 121.3 119.8 77.7 95.8 96.0 83.2 88.3 2014Q1 148.3 129.5 117.6 122.5 121.8 76.7 95.4 97.0 86.5 88.7 2014Q2 153.5 131.3 117.4 124.3 123.1 76.3 96.2 97.9 88.7 89.3 2014Q3 152.5 132.8 119.1 123.8 124.2 75.2 94.7 98.5 87.7 89.7 2014Q4.2 134.1 117.7 121.4 123.4 74.0 93.1 98.5 86.5 89.2 Change p.a. +4.6% +3.0% +1.1% +2.4% +3.6% -8.0% -2.4% -1.1% -1.7% -3.3% Chart 5: Wealth prices in the two groups of euro area countries 160 140 130 120 90 80 70 Northern countries (BE, DE, FR, NL, AT, FI) FvS WPI Southern countries (GR, ES, IT, PT) 4
EMU fell into crisis. Wealth prices in southern European countries plotted as dashed lines tended to decline while wealth prices in central and northern European countries plotted as solid lines tended to increase. Price changes between the fourth quarter of 2009 and the fourth quarter of 2014 ranged from +4.6% p.a. in Austria to -8.0% p.a. in Greece (Table 1). For the group of central and northern European countries, wealth prices went up by 14.7% in total during this period (Chart 5). For the group of southern European countries, they declined by 14.0%. The key driver of the divergence of wealth prices between countries were differences in the development of real estate prices. Future challenges Asset prices both reflect and influence economic developments. They reflect them as they measure the present value of future developments. And they influence them as building blocks of balance sheets. Variations of asset prices induce adjustments of balance sheets that impact economic flows. Specifically, increases of asset prices raise the capacity for more debt. Higher borrowing for consumption and investment creates a positive credit impulse that boosts economic growth. Conversely, lower asset prices create the need for debt reduction. Lower borrowing in turn translates into a negative credit impulse and lower economic growth. The relationship between asset prices, borrowing capacity and economic activity is illustrated in Chart 6. In Germany, household wealth prices, denoted DVP, soared between 2012 and 2014 (+12.2%). The rise in prices was accompanied by increases in bank loans to private households (DHHL, +4.0% until 2015Q1) and real GDP (DGDP, +2.7% until 2015Q1)). By contrast, household wealth prices fell in Italy (by 5.3%) during this period (IVP), alongside with bank loans to households (IHHL, -2.6%) and real GDP (IGDP, -2.7%). The divergence of asset price developments amplifies the divergence of economic growth among EMU member countries. However, increasing real economic divergence lowers the suitability of the common monetary policy for individual countries. Common policy rates and the exchange rate may appear appropriate at the aggregate level while they Chart 6: Wealth prices, loans, and GDP in Germany and Italy 114 112 108 106 104 102 98 96 94 2012 Q1 = Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 2015 DHHL IHHL DGDP IGDP DVP IVP Source: Haver, FvS Research Institute; see appendix for detailed information. 5
are, in fact, inappropriate in each individual case. For economic policy the key question therefore is, whether it is possible to initiate a process of real economic convergence. If so, convergence of asset prices will be induced and a virtuous circle of real growth and asset price convergence started. If not, a vicious circle of asset price and growth divergence will strengthen centrifugal political forces in EMU member countries. Whether EMU will survive in the long-run, will therefore depend to a significant degree on the chances for convergence and divergence of asset prices and economic growth. LEGAL NOTICE The information contained and opinions expressed in this document reflect the views of the author at the time of publication and are subject to change without prior notice. Forward-looking statements reflect the judgement and future expectations of the author. The opinions and expectations found in this document may differ from estimations found in other documents of Flossbach von Storch AG. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. This document does not constitute an offer to sell, purchase or subscribe to securities or other assets. The information and estimates contained herein do not constitute investment advice or any other form of recommendation. All information has been compiled with care. However, no guarantee is given as to the accuracy and completeness of information and no liability is accepted. Past performance is not a reliable indicator of future performance. All authorial rights and other rights, titles and claims (including copyrights, brands, patents, intellectual property rights and other rights) to, for and from all the information in this publication are subject, without restriction, to the applicable provisions and property rights of the registered owners. You do not acquire any rights to the contents. Copyright for contents created and published by Flossbach von Storch AG remains solely with Flossbach von Storch AG. Such content may not be reproduced or used in full or in part without the written approval of Flossbach von Storch AG. Reprinting or making the content publicly available in particular by including it in third-party websites together with reproduction on data storage devices of any kind requires the prior written consent of Flossbach von Storch AG. 2015 Flossbach von Storch. All rights reserved. SITE INFORMATION Publisher: Flossbach von Storch AG, Research Institute, Ottoplatz 1, 50679 Cologne, Germany; Phone +49 221 33 88-291, research@fvsag.com, Directors: Dr. Bert Flossbach, Kurt von Storch, Dirk von Velsen; Registration: No. 30 768 in the Commercial and Companies Register held at Cologne District Court; VAT-No. DE200075205; Supervisory authority: German Federal Financial Services Supervisory Authority, Marie-Curie-Straße 24 28, 60439 Frankfurt / Graurheindorfer Straße 108, 53117 Bonn, www.bafin.de; Authors: Dr. Thomas Mayer and Christopher Thiem; Editorial deadline: 27. July 2015 6
Appendix Table A1: Data sources for the weighting scheme and the time series Household balance sheet Data sources for the time series Data sources for the weights¹ Total real assets * Real estate Haver - Housing Prices; ECB SDW** - Residential Property Index (Portugal) Business wealth Thomson Reuters - MSCI Country Small Cap Price Indices Other real assets Consumer durables Estimated Furniture ECB SDW - HCPI*** ECB SDW - HCPI Vehicles ECB SDW - HCPI ECB SDW - HCPI Audio-visual, photographic and information processing ECB SDW - HCPI ECB SDW - HCPI Other recreational items and equipment ECB SDW - HCPI ECB SDW - HCPI Collector's items Estimated Arts Artnet Price Indices Estimated Fine wine Liv-Ex Fine Wine Index Estimated Historic automobiles HAGI Top Index Estimated Total financial assets Cash holdings Deposits - Money owed to households - Bonds Barclays Bond Price Indices ; IMF CPIS**** Shares Thomson Reuters - MSCI Country Price Indices ; IMF CPIS Other financial assets Gold Thomson Reuters - London Bullion Market Avg. Estimated Commodities Thomson Reuters - Continuous Commodity Index Estimated Mutual funds, total (Weights only)², EFAMA***** - Asset Mgmt. Reports Voluntary pension/whole life insurance (Weights only)² Pensions (Weights only) OECD - Funded Pension Indicators Life insurance (Weights only) OECD - Destinations of investments by direct life insurance companies ¹ Base year = 2010 ² Mutual funds, pensions and life insurances are containers for other assets. Their share of total assets is thus split in accordance with the data on their asset holdings. * : Eurosystem Household Finance and Consumption Survey ** SDW: Statistical Data Warehouse *** HCPI: Harmonised Consumer Price Indices **** CPIS: Coordinated Portfolio Investment Survey ***** EFAMA: European Fund and Asset Management Association