from worldeconomics.com

Brian Sturgess, Brian Sturgess - April 2013

Speed Read

A recent European Central Bank survey shows large differences in average net assets per household across the euro area from a median figure of €51,400 in Germany to €397,800 in Luxembourg.
The prime real asset held by European households is residential real estate and a large part of the cross-country differences can be explained by differences in national home ownership rates and in the dynamics of house prices.
The wealth disparities between Germany, and the financially strained countries, imply a ‘poorer’ north is supporting a relatively richer south threatening the euro’s stability.

German households: among Europe’s poorest?

The European Central Bank (ECB) has published a survey of household wealth across the euro area which provides further evidence of the enormous economic imbalances existing across the currency area. The survey [1] of 15 euro area countries based on a sample of more than 62,000 households indicates that German households had the lowest level of median net wealth at €51,400 among the countries surveyed. The survey, which had a reference year of 2010, also shows that the median levels of net household net worth were much higher in financially troubled countries such as Greece at €101,900 and Spain at €182,700. In Portugal, the median household net assets stood at €75,200 while the median figure for Cyprus was €266,900. These inter-country comparisons are shown in Chart 1.

Median wealth and income figures are affected strongly by the distribution of income. However, comparing countries using mean household wealth[2] still shows that the citizens of some of the countries receiving bailout funds are richer than the average German. Mean net household wealth in Germany at €195,200 is 32% greater than Greece, 28% more than Portugal, but is only 67% of the level of mean net wealth of households in Spain. The mean figure for household wealth in Cyprus was estimated by the ECB at €670,900 more than three times the German level and just below that of Luxembourg, the richest country in the European Union, at €710,100.

Chart 1: Median and Mean Net Household Wealth - 15 Eurozone Members

There are a number of reasons why these differences shown in the table may be exaggerated by institutional and dynamic factors, but the conclusion remains on the basis of these estimates that the average German household has far less private wealth than many other euro area countries including those whose public sector indebtedness threatens the stability of the euro project. The size of the imbalances indicate the nature of the economic and political strains that German citizens will have to bear if the country and its citizens continue to be a major pillar of support for the single currency.[3]

The importance of home ownership

The ECB survey defines household net wealth as the sum of private real and financial assets net of total liabilities. Real assets accounted for 85% of the total gross value of euro area household wealth and the most prevalent real asset held was their main residence accounting for 60.8% of the total. [4]

The survey ignores public pension provision, but the ECB data showing the reported relative poverty of German households is not compensated for by a glut of collective pension assets. Estimates made by Aviva show that the Germany has a total pension fund provision deficit of €458.8 billion equivalent to €5,657 per capita compared with comparable figures of €3,597 per person in Spain, €3,695 in France €1,587 in Italy.[5]

Differences in net wealth across Europe depend obviously on income since assets are built up from savings over time and there should be a relationship between net assets and income. [6] However, despite their higher income levels households in Germany, Finland and the Netherlands appear to have amassed far fewer net assets than would be expected given GDP per capita levels, while households in Spain are richer than would be expected. The ECB survey notes that differences in family size and the age composition of the population in each country also impact on the observed cross-country variation in net wealth, but the main causes of the wealth differences across Europe is related participation in the housing market and the relative value of residential assets.

In the ECB survey cross-country differences in median wealth levels fall for property owning households were far less if the sample is split into homeowners and non-homeowners compared to all households. [7] Therefore, a significant part of the dispersion in median net wealth across countries is due to differences in the rate of homeownership. Chart 2 shows that Germany, where the provision of public housing is important, has the lowest rate of home ownership at 44.2% compared with a cross-country average rate of 68.8%.

An additional factor is the dynamics of national real estate markets and the value of a household’s main residence. The survey was a cross-section study with a reference year of 2010, but for Spain data collected refers to 2008 and to 2009 for Greece. Some adjustment would be necessary for differences in asset price deflation between countries as a result of these discrepancies, but the fact that conditions of boom and bust in real estate markets have not been perfectly correlated across the European countries surveyed means that even the use of a single reference year would catch different countries at varying points of their property price cycles. For example, from the end of December 2001 to December 2008, Spanish residential property prices had increased by 103%, while the value of German homes had fallen by 3.8% from the same start date to the end of December 2010. [8] More recent estimates of net household wealth based on the dynamics of property markets would need to take account of the fact that German prices have risen by 10% since the ECB survey’s reference year while Spanish property has declined by 24%.

Chart 2: Home ownership rates across Europe

A German Euro is not a Spanish Euro

There are a number of other data issues that go some way to explain the observed differences in net wealth between countries. A serious problem with the ECB survey is that the data is inherently subjective with households reporting self-assessed prices so that net wealth ‘is determined by the assets and liabilities that it reports.’ [9] Household estimates of residential property values are likely to be biased during periods of rapid price appreciation or decline.

Another problem noted by the ECB is that ‘the data have been aggregated considering neither price adjustments for the differences in reference years across countries, nor purchasing-power parity adjustments across countries.’[10]Adjusting wealth estimates for purchasing power parity implies that the unit of account used to make comparisons, the euro, is not the same across countries. Relative price differences means the purchasing power of the euro zone could vary significantly depending on the structure of relative prices. Some evidence of these disparities in the price of a similar basket of consumer goods is given by the data provided by the World Price Index which has been calculated by World Economics for over two years.[11]. The most recent figures for April 2013 suggest that the price level in France is 24% higher than in Germany meaning that a euro of wealth in Germany is worth relatively more in purchasing power.

Conclusion

The ECB wealth survey suffers from a number of data problems including reference year differences, reporting subjectivity and the neglect of purchasing power variations in the euro between countries, but adjusting for these will only go some way in explaining the observed cross-country differences in wealth across the Eurozone highlighted by the ECB survey. German households appear from the survey to be less wealthy than their southern European counterparts. Over time changes in asset and product prices may eliminate such imbalances, but in the short-term the disparities can only put more pressure on the euro and on the maintenance of the perception of an equitable distribution of the financial burden required to support it.

References

European Central Bank (2013), The Eurosystem Household Finance and Consumption Survey Results from the First wave, Statistics Paper Series, No 2, April: http://www.ecb.int/pub/pdf/other/ecbsp2en.pdf?34f66ea231daaaf2517e07299171f6c4

[1] ECB (2013)

[2] Inequalities in the distribution of wealth affect the difference between the median and mean estimates of household net assets.

[3] GDP per capita data from Eurostat: http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do

[4] Financial assets make up the remainder of household gross assets and the most prevalent financial asset in the euro area was deposits accounting for 42.9%, followed by private pensions/life insurance at 26.3%, mutual funds, 8.7%, shares, 7.9%, bonds, 6.6% and other financial assets, 5.3%.

[5] The estimate of the "pensions gap" is based on looking at the additional annual amount which citizens retiring between 2011 and 2051 would need to save - in addition to their existing anticipated state and private pension income - in order to ensure an adequate lifestyle in retirement. "Adequate" is defined as an average retirement income of 70% of pre-retirement income (a level used by the Organisation for Economic Co-operation and Development (OECD). See http://www.aviva.com/europe-pensions-gap/pensions-gap-europe.html

[6] This relationship is positive and linear, but in a cross-section study such as this it is distorted by a variety of factors such as the age composition of a country's population.

[7] Specifically the coefficient of variation, a measure of dispersion falls from 62% for all households to 50% for home owing households.

[8] Calculations based on data distributed by Bank of International Settlements. See http://www.bis.org/statistics/pp.htm

[9] See ECB (2013)p.87.

[10] See ECB (2013).p9.

[11] See World Price Index (March 2013): http://www.worldeconomics.com/WorldPriceIndex/WPI.efp