In our new Working Paper “The yield on private financial assets – Germany in an international comparison” we have examined how the financial assets of private households in nine eurozone countries have fared under the zero interest rate policy. We focused our attention mainly on the contribution to growth stemming from gains in value and asset income in recent years.
German savers have always pursued a conservative investment policy, with securities playing only a subordinate role in the asset portfolio. The upshot: Changes in value have in the past contributed very little to asset growth; only in the second half of the 1990s did savers briefly flirt with shares, with value gains contributing about one-third to growth.
Little has changed in the current low interest rate environment. Since 2010 asset growth has largely been attributable to intense savings efforts: In no other country covered by our analysis do people save more in relation to the stock of assets. What is more: nowhere is the proportion of savings stemming from earned income higher than in Germany. By contrast, households in the majority of the other countries feed their financial asset formation exclusively from asset income.
With their large “genuine” savings, German savers compensate for the key Achilles’ heel of their asset portfolio: the low increases in value; with only just under EUR 1,400 on average since 2010 (per capita), they bring up the rear in this international comparison. Even households in crisis-torn Spain and Portugal were able to record absolute gains in value approximately twice as high – although per capita assets are much lower.
The low increases in value in the portfolio are also reflected in the meagre return on assets: since 2010 German households have generated an average annual yield of 2.8%; over this period only the Austrians did worse (2.6%). Leading the field, by contrast, are the Finns (6.5%) and the Dutch (7.2%).
The asset class of the securities (shares, bonds and investment funds) is the key to the return on assets: the scale of value gains determines the difference in returns. By contrast, bank deposits in all countries make only a marginal contribution to performance. By contrast, claims against insurances and pension funds prove to be a yield anchor, making a similarly solid contribution to returns everywhere. The sole exception is the Netherlands, where company pensions are the main driver of yields.
In real terms the return on assets for German households melts to an average 1.2% a year. Compared with other eurozone countries, this is disappointing: since 2010 even households in crisis-plagued countries such as Spain and Por-tugal have scooped up real returns on their financial assets almost three times those of German households. Asset yields are determined less by prevailing market conditions but are rather a function of investment behavior. Finland and the Netherlands show that real returns of 4% and 5% respectively can be generated even in a challenging environment.
The importance of savings behavior and the composition of assets is confirmed by the analysis of returns for households with different incomes. Households with higher incomes not only have a higher proportion of securities in their portfolio, they also generate a higher yield. In Germany the gap in returns amounts to a good percentage point. The current low interest rate backdrop thus exacerbates wealth differences as higher income groups generate higher returns thanks to the greater emphasis on risk and the long-term nature of their portfolio structure. As a result, their assets can grow much faster than the average even without additional savings efforts. But the example of the Netherlands shows that this connection is by no means immutable. With the help of a prudent pension policy, inclusive wealth growth is achievable.
At the end of the day, the lesson is sobering: German households save a lot, but with little to show for it. Low returns cannot be blamed on adverse circumstances alone, they are first and foremost the upshot of savers’ own behavior. Our neighbors show us how it can be done. It is high time for Germans to rethink their savings strategy.