European Wealth Reports: Why “Median” Italians are Far Richer than Germans

Median Wealth 

After rumours and big expectations, on the 21st of March 2013,  the Bundesbank presented its first report on German households’ finances and wealth; while, in December one for Italy had been published. According to the German Bundesbank, the European reports showed a median wealth of around 163’400 € in Italy vs. 51’400 € for Germans.

As for average wealth, Germans are richer with 195’000 € against 157’000 € for Italy implying that wealth is unequally distributed in Gemany and pretty equally in Italy. Moreover wealth is inequivally distributed between East Germany’s average of 67500€ and the West 230240€. As opposed to Italians with 68.4%, less Germans, namely 44.2% own their home.

Average, Median  Wealth and home ownership rate in Europe

Geographic Divide

The German Central Bank  is just one institution within a wider European Project (Eurosystem Household Finance and Consumption Network) that will contribute to the understanding of a family’s finances and the balance sheet of households, thus following the way already paved in the 1960s by the Banca d’Italia.

The survey also shows that cheap ECB rates helped many Southern Europeans to acquire property and to prop up prices. This tendency was sustained by many Germans or British nationals who bought houses in sunny places.

A description of Italy’s household wealth

Let us first look at the static picture in 2007, i.e. the situation before the crisis.

On the asset side Italian families’ total estimated gross wealth was 9’308bn Euro (giving an average of 157’500 Euro per capita). 3’713bn Euro (39.9%) were represented by financial assets; about 1’000 bn were held in cash and deposits, while around 895bn were shares and quotas of private companies. Some 610bn were invested in pension funds or constituted insurance reserves, and 355bn were invested in unit trusts (both foreign and national). Around 310bn Euro were devoted to finance private companies (mainly Bank bonds) and Italian sovereign bonds amounted to 268bn Euro. About 5’596bn Euro (60.1% of total assets) are attributable to real estate and precious objects, which are made of dwellings and civil buildings for 4’688 bn Euro and 788 bn of land, and industrial buildings and machinery; precious objects (excluding, luxury cars, watches, appliances, etc.) account for roughly 200bn Euro.

Having a look also at 2011 shows that the average wealth has not changed (157’080 Euro per capita); the composition of real assets has not changed substantially either. To the contrary, total financial wealth decreased by 4.6%, coming to about 3’542bn Euro and real assets increased by around 7%. It is also worth noting the changing composition of financial assets. Cash, deposits and private debt increased while sovereign bond holdings decreased by a whopping 31.5%; shares and unit trusts, which suffered from substantial price decreases, plummet by 25.9% and 30.3%, respectively.

On the liabilities side, Italian families’ total debt was about 799 bn Euro, 43.5% of which was represented by mortgages and slightly less than 30% by other financial liabilities and consumer credit. Somewhat surprising for parsimonious Italians, the latter figure increased by 26.6%, much more than mortgages (+10.1%). Hence, this strong increase in consumer credit (+63bn) is the first sign of consumers’ strains and stresses, and should be read in combination with the constantly decreasing private saving rate. On average financial liabilities increased by 12.6% thus reducing net financial wealth by 9.3% over the period. Net households’ wealth increased slightly by 1.2% from 8’510bn Euro to 8’620bn Euro.

The Average Wealth of an Italian Household

We explain why according to the European wealth reports "median" Italians are more wealthy than Germans. The main reasons are high savings and accumulation of wealth for the average family until the 1990s, often invested in homes and real estate. Low ECB interest rates finally let the value of the home rise strongly. - Click to enlarge

Source: Banca d’Italia, La ricchezza delle famiglie italiane, Supplementi al Bollettino Statistico, n. 65, 13 dicembre 2012 * excluding durable goods (e.g. cars, watches, furniture and appliances, ecc.) which are consumption goods; precious objects are estimated

Additional figures and international comparison

We added some additional figures: Household debt to GDP is with 56.9%, compared to public debt and even compared to other nations relatively small.

Compared to the high level of households’ assets, the sum of household and public debt is not excessive with 29.4%, despite the high level of public debt.

Household debt to GDP

source GFMag based on Mc Kinsey data

Where does the Italian Wealth Come from?

Household wealth is clearly the result of accumulated savings. At least until the mid 1990s Italy had one of the highest saving rates of advanced countries (around 20% of disposable income).

Savings in turn, may be allocated to liquid financial resources or invested in real estate and precious objects. The estimates by the BoI show that in 2007, 50% (53% in 2011) of Italian household total assets are attributable to real estate. This seems a relatively high share compared to other countries, especially compared to Germany, that can be explained by looking at Italy’s economic history and its socio-cultural traits.

Italian Household Savings Rates Have Fallen from 18% in 1994 to 3% in 2013

Source OECD

Why Italians Prefer(ed) Real Estate as Investment

First, Italians own their homes and dislike rents. The reasons are manifold: cultural preferences, extensive legal protection of the tenant at the expenses of the landlord, progressive taxation of rent-income and a relatively high property tax. All in all, from an economic point of view, it does not make sense to buy a flat and rent it; hence, the rental market is small, illiquid and expensive. According to the Bundesbank press release, 82% of Spaniards, 69% of Italians, 58 of French, but only 44% of Germans own a home.

Second, Italy’s large shadow economy supported by relatively scant control and soft punishment, allowed business people and the self-employed to recycle money into real estate activities.

 House Price Change in Italy

source Global Property Guide

Real estate As Inflation Hedge

Third, but probably most importantly, over the last 30 years, Italians “invested in the brick” (“investire nel mattone”), as they use to say, to protect their savings from above-average inflation. The high saving rate, inflation-linked wages (until 1992) and growing nominal income thereafter, made it relatively easy to repay the outstanding nominal debt. Higher interest rates, especially until 1999, made it more attractive for Italians to choose lower maturities and pay back earlier than Germans. This explains why today the 5’000bn Euro real assets are financed by less than 400bn Euro in outstanding mortgages. By comparison, the Bundesbank estimates total aggregate housing debt in Germany (2010) at about 1’000bn Euro, which calculated on a per capita basis, is about twice as much real estate related debt as the average Italian has to service. As a consequence of the first three factors real estate prices have been growing constantly over the last 30 years.

Falling Real Estate Prices since 2008

Italy’s house price index fell by 4.64% in 2012, according to Eurostat (-6.94% after inflation).  This follows almost four years of house price falls. From 2000 to H1 2008, house prices surged by 85% (53% inflation-adjusted), based on figures from Nomisma. However, house prices started to fall in H2 2008, mainly due to the global financial meltdown.
The relevance of real estate and construction in Italy can also be traced back to the roots of its manufacturing specialization in the 20th century. Indeed, Italy was or sometimes still is the world market leader in many household and personal goods such as furniture and appliances, tiling, glass and wood products.

Sustainability and the long road ahead

While on aggregate, households balance sheets appear rock solid, but the public sector’s debt burden grows constantly. However, even adding the outstanding public debt (10% of which are household assets) to all households liabilities carries a net positive financial worth in excess of 500 bn €. As we have seen above, the ratio of household and public to total household assets is relatively small with 29%.

By contrast, Italian families struggle on the income side, flows are shrinking because of the eroding action of taxes and inflation.

This casts doubt on the sustainability of both the public debt because tax revenues are closely linked to, and hinge on, economic growth, and the financial sector, which is profoundly dependent on real estate and sovereign bonds. The risk of price deflation in both real assets and the financial market is a potentially explosive mix for Italian banks and national investors.

To keep the country on track, nominal aggregate demand must be relived. To restart growth and increase private sector spending only a few options are at hand; for instance, a combination of accommodative monetary policy and moderate wage increases. The latter may be boosted by substantially shifting the tax burden from income and labour to real estate. Just as Nordea research states: “In crisis countries, there is a lot of wealth that can be taxed as one way to re-balance public sector accounts” (Source Nordea).