In fact, the real rate of return for German private households on bank deposits last year, at minus three percent, was the lowest it had been since the euro was introduced in 1999 – primarily because of inflation. Other interest-bearing securities such as bonds have also recently yielded in negative territory and were thus well below their long-term averages.
Elsewhere the situation is similar. Be it Spain, France, Italy or the euro area as a whole, real yields on interest-bearing debt were unusually low everywhere in 2021. However, they were consistently negative only in Germany. That and the historical background of two currency reforms should explain why the debate about the dangers of inflation in this country – once again – flared up particularly violently.
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However, households do not only own debt instruments. They also invest in other asset classes, such as stocks, mutual funds or real estate. And there a completely different picture emerged in the same period: The rally on the stock and real estate markets continued unabated despite a brief corona dampener and the first interest rate increases. The result: German households achieved a whopping 27.5 percent return on their stock investments last year.
High income from real estate assets
At 7.5 percent, the real income from real estate assets in Germany was not only above average, it was also higher than in all other major euro countries. Contrary to what is consistently claimed, savers are not shaken per se. What matters is how you save. This is often forgotten in the heated inflation debate.
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On top of that. In addition to interest on bank deposits and debt instruments, interest on borrowed capital has also reached historically low levels in recent years.
According to our study “Real returns on private households: It’s all about the balance sheet,” the real interest rate burden for consumer and real estate loans in 2021 for German private households fell to minus one percent – the value was negative for the first time since the start of monetary union.
Although the situation is similar in other large countries in the euro area, nowhere in 2021 were real lending rates as low as in Germany. Debtors are the beneficiaries of high inflation
though generally known. The extent to which they are benefiting from the price increase, especially in Germany, is likely to surprise most.
Against this background, is it even possible, as many are doing, to speak of a creeping “expropriation” of German savers? We are of the opinion: no. Why?
Because our calculations provide three key counter-arguments: First, the real return on assets on all property and financial assets of German private households, which has been trending since 2000, was 5.4 percent last year, well above its long-term average of 4.1 percent.
Above average returns on stocks
The reasons for this positive long-term result were both the above-average returns on shares, investment funds and real estate assets and the fact that these types of assets accounted for around two-thirds of total assets over the long term.
The negative returns on bank deposits and other school titles, which on average only contributed about a tenth of the total return, were thus clearly overcompensated – and correspondingly overvalued in the public discussion.
Second, the real return on equity, which also takes into account the cost of borrowing, was 6.3 percent in 2021, also well above its long-term average of 4.2 percent. It is also following a positive trend, which is caused on the one hand by the continuous decline in real lending rates and on the other hand by the increase in the return on assets.
Also, since 2009, the return on equity has consistently been higher than the return on total assets due to lower interest rates on debt relative to the return on all assets.
Thirdly, while real returns on total assets and equity in Germany follow a positive trend over the long term, the development in the other large euro countries is in a negative direction – and for the euro area as a whole, in particular because of the positive development in Germany, rather sideways.
The reasons for this vary: sometimes the portfolio structure is decisive, sometimes it is country-specific price or interest rate developments. Regardless of this, this result suggests that complaints about the negative effects of low interest rates and high inflation are excessive, especially for German savers.
Consider the real cost of debt
However, it is also clear that the portfolios of individual households differ from one another. If you mainly hold interest-bearing debt securities, the returns are significantly lower than if you hold a high proportion of shares, investment funds or real estate.
Surveys regularly show that German households with little wealth primarily have bank deposits and insurance products. Investment forms with higher yields only become more important with increasing wealth. In this respect, it is not surprising that poorer households in Germany generally achieve lower real returns than richer ones.
However, this effect is less pronounced than is often assumed. For example, while the range in financial assets between the households with the lowest and the highest return was 3.8 percentage points in 2010, it was only 2.1 percentage points in 2017 – more recent data are not yet available. That’s still a sizeable difference. However, it is not as high as is sometimes suggested in public discourse.
Conclusion: Yes, it is true that inflation is a burden on savers in this country and elsewhere. So far, however, the consequences have been far less dramatic than is often claimed. In fact, German private households achieved even higher real returns in 2021 than the long-term average.
They also performed well above average in comparison with other euro countries. This is especially true if you take into account the real costs of debt in addition to the real income from the assets.
There can therefore be no talk of “expropriation”. In the case of households with fewer assets, one-sided investment behavior and no debt, this may be the case, but certainly not at the macroeconomic level.
In this respect, it is important to differentiate. Sweeping claims that the high price increases would dispossess German savers may sound crisp, but they do not stand up to closer scrutiny.
More: “This further increases the uncertainty” – the capital market outlook for the current week