Friday, March 22, 2013

Household Net Worth - an Attempt at some perspective

Yesterday, the Bundesbank published - among other data - the household net worth, not only for Germany but also for Spain, Italy, France and Austria. Italy has a median household net wealth that is three times higher than that of Germany. This was an attempt at giving some perspective to those numbers, it became something that asks more questions than it gives answers. But, hopefully discussion points that - even though I cannot give a conclusive answer are worth some time.

The Bundesbank survey, interviewed 3,565 households (4,000 planned) face-to-face and computer assisted between September 2010 and July 2011. The German study is part of a wider ECB effort (HFCN), in an attempt to harmonise the the data for all Euorzone countries.

Germany, with a median net worth of € 51,400 per household, was behind the other large countries of the monetary area. With both the crisis countries Spain and Italy coming in at more than three times that number. Comparing the averages, the distance to the other countries is lower, here Spains net worth (€ 285,800) is almost 1.5 times the German value (€ 195,000).

The Bundesbank also provided numbers for east and west Germany. Citizens living in the east have both on average( € 67,500/230,240) and median (€ 21,400/78,900) a significantly lower net worth compared to their western counterparts. Showing that the country is, still, over 20 years after the reunification not at a point of similar living standard in both parts. It is, therefore, best to only compare the west German number to that of the other Euro area countries. Also, it is safe to assume that there is some drag on the west due to measures to help the east. The "Solidaritätszuschlag" (5.5 % of wages), designed to help pay for the reunification costs, affects every German above a certain freshhold, but since wages in the "old" states are higher, it can safely be assumed, that those are more affected. Three states (Bavaria, Baden-Württemberg and Hessen) additionally pay the "Länderfinanzausgleich" which primarily, helps the eastern states.

The by far biggest source of wealth is real estate (average € 168,000 or 86 %). In Germany over half the population does not own a house or flat. In the other countries citizens are far less likely to rent.

The huge difference between the Eurozone countries is in dire need of of an explanation, especially since the GDP (PPP) numbers per capita show a very different picture, with Germany in second place behind Austria. It is clear that this is not a perfect indicator for the standard of living, still these numbers are worth being considered. According to the world bank, in 2011 Germany's GDP per capita in US dollars came in at almost $ 39,500 with Italy and Spain last at around $ 32,600 and $32,000. Disposable income numbers also seem to indicate that Germans could be wealthier.

One possible explanation for the discrepancy, that I have seen, was WWII. Yes the war did destroy a lot of wealth in Germany, both in industrial production capacity and private property but since Austria was less affected, and is at the same level and a similar country to west Germany (France, Italy and Spain [civil war] were also hit hard) one can savely assume that this is not the case.

So, those numbers could just reflect reality or there might be a systematic component that reduces the reported wealth in Germany compared to say Spain. (!) What now follows is purely anecdotal. It is just a personal assumption. It is not evidence. It is just an idea, which I find worth discussing but for now it is only speculation(!)
In Germany there is - in my opinion - a tendency to understate the wealth. The German middle class is reluctant to give an answer in the first place. Often people will not state their income, if asked. Also we likely look to hard numbers. Asking home owners what their house is worth will - in my opinion - likely result in the price they paid not a realistic estimate. These just might be 30 years old numbers. Again, even if directly asked to give an estimate there will in my opinion, be a tendency to understate house price inflation. This might explain some of the difference, since 86 % of the wealth in Germany is in real estate.
On the other end of the equation, Spaniards, for example, might - due to the housing bubble - show a tendency to overstate their wealth.

I have not found the questionaire on the Bundesbank homepage, so I do not know for a fact how or if such a possibility was taken into account. I have also not found a satisfying answer in the published paper, either. If, you find it feel free to contact me and I will update this.

German median household net worth is a lot lower than in other countries, which indicates higher inequality in Germany than in other countries, since the difference between the averages is not as high. This might reduce the will of the Germans to accept further rescue actions. The numbers published by the Bundesbank seem to contradict what GDP per capita indicates. One possible explanation is a different answering behavior of Germans compared to that of other countries.Other possibilites might be:

  • Paying rent reduces wealth so much that the country would have to find answers. This would explain the low median
  • Germans are spending much more than people of other countries. This seems to be contradicted by the savings rate. Only France has a higher savings rate. 
  • Perhaps export orientation isn't such a good business model after all.  
  • Germany is also the country which contributes the most to the EU. But that number does not seem to be significant enough to explain such a discrepancy

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