Discussion paper: equity price increases amplify net wealth inequality

Do rising equity, bond or property prices affect the distribution of wealth in the euro-area countries? That was the question which researchers from the University of Mannheim and the Bundesbank's Research Centre tackled in a paper entitled "Distributional Consequences of Asset Price Inflation in the Euro Area". To investigate this issue, they explored how a hypothetical 10% rise in equity, bond and property prices would affect the net wealth levels of euro-area households.

They found that equity price rises make wealthy households in particular richer still because equities in the euro area are held primarily by the most affluent 5% of households. An increase in equity prices thus causes the gulf between rich and poor to widen further, the researchers note. This effect is illustrated by the Gini coefficient, which experts use to measure inequality in a given country and which ranges from zero (perfect equality) to one (maximum inequality). The researchers found that a 10% increase in equity prices raises the Gini coeffi-cient by 0.5%.
They observed no such effect when bond prices rose by the same amount. "Bond price in-creases leave net wealth inequality largely unchanged," they write in their paper, attributing this finding to the fact that wealthy and less wealthy households alike are invested in bonds by way of endowment policies and other investments. That, the researchers conclude, is why the bond price increase barely had any impact on the Gini coefficient.

The researchers note that these "findings for the euro area as a whole extend in a rather similar way to individual euro-area countries," but add that many households are not affected whatsoever by rising prices in these asset classes. "Three-quarters of the population largely fails to benefit from bond price or equity price increases".

Middle class and upper middle class households benefit

The paper reveals a different picture when real estate prices rise. In many countries, real estate is also held by the middle and upper middle classes; in a smaller subset of countries, poorer households are homeowners, too. That, the researchers explain, is why an increase in property prices has a particularly strong financial impact on these households relative to their net wealth. The paper finds that the benefits are especially rewarding for middle class households. Richer households hold a smaller proportion of their wealth in housing compared to middle class and upper middle class households, the researchers explain. This, they write, is why a rise in housing prices narrows the gap between rich and poor in the euro area. Indeed, it reduces inequality, measured in terms of the Gini coefficient, by 0.6%.
However, the picture is very mixed indeed among the individual countries of the euro area. The coefficient falls the most in Belgium, Finland, the Netherlands and Spain (down 1.2% in each case) and the least in Germany (down 0.2%). One reason for this is that many households in Germany live in rented accommodation rather than owner-occupied properties.

More than 36 million households not affected

The researchers also identify a subset of households for which the financial impact of price increases in the three asset classes would be non-existent, writing that "more than 36 million households in the euro area fail to be significantly invested in long-dated assets" such as bonds, equities or housing. This subset makes up roughly 20% of households in the euro area and is typically at the low end of the income and net wealth distribution. This contrasts with the substantial capital gains of households that hold long-dated investments and are usually in a higher income and net wealth bracket. The researchers based their paper on data from the Eurosystem's Household Finance and Consumption Survey (HFCS), which investigates the distribution of income and net wealth in a total of 15 euro-area countries. The HFCS surveyed 62,000 households, mostly in 2010.

The paper was authored by Klaus Adam (University of Mannheim) and Panagiota Tzamourani (Deutsche Bundesbank). The opinions expressed in the paper do not necessarily reflect those of the Bundesbank or its employees.