Introducing the Distributional Wealth Accounts for euro area households

Prepared by Nina Blatnik, Alina-Gabriela Bobasu, Georgi Krustev and Mika Tujula

1 Introduction

This article introduces the euro area Distributional Wealth Accounts (DWA), a dataset developed by the European System of Central Banks (ESCB) which provides new experimental statistics on household wealth. The DWA data complement traditional macroeconomic national accounts and household surveys by providing information on household wealth that is consistent with the macroeconomic Quarterly Sectoral Accounts (QSA).^[1] The DWA aim to meet the growing interest in understanding wealth distribution dynamics in the euro area and across euro area countries.^[2]

The DWA are of particular interest to central banks, facilitating the analysis of the distributional wealth effects of inflationary and monetary policy shocks. The DWA also support the ECB’s monetary policy strategy, which aims to include a systematic assessment of the two-way interaction between income and wealth distributions and monetary policy.^[3] Households differ significantly in their levels of wealth and its composition, and in the sensitivity of their income to economic shocks. Therefore, the distributions of wealth and income play a key role in shaping the transmission of monetary policy to economic activity and inflation. At the same time, monetary policy may have heterogenous distributional effects.^[4]

This article explores the main features of the DWA and illustrates how the dataset can be used to analyse the distributional effects of macroeconomic shocks, including monetary policy. Section 2 describes the methodology used to compile the DWA, discussing data sources, estimation techniques and data availability. Section 3 presents evidence on the key features of the dataset, documenting the dynamics of the wealth distribution and wealth components over time at the euro area level and across countries. Section 4 discusses how changes in asset prices affect household wealth across the distribution depending on the composition of assets and liabilities and explores the implications of asset prices for wealth inequality. Section 5 assesses the effects of rising inflation and subsequent monetary policy tightening across the wealth distribution, and their impact on inequality. Section 6 concludes.

2 The DWA methodology

The DWA provide timely quarterly distributional information on wealth, aligned with the macroeconomic aggregates. The DWA include data on household net wealth and on financial and non-financial assets and liabilities and their components (Figure 1). Households are broken down into the top five deciles of net wealth and the bottom 50%, as well as by employment and housing status. The DWA also provide inequality indicators such as the Gini coefficient, share of net wealth held by the top 5%, 10% and bottom 50%, mean and median net wealth, and debt-to-asset ratios by net wealth decile. Data are available for the euro area as a whole, and for all euro area countries except Croatia, as well as for Hungary. Time series for the euro area are available from the first quarter of 2009, whereas the starting date for the DWA country data varies depending on the availability of the distributional source data. Data are compiled every quarter and published five months after the end of each reference quarter.

Figure 1

Main DWA features: components of assets and liabilities

The DWA are constructed by linking household-level information from the ECB’s Household Finance and Consumption Survey (HFCS) to the macroeconomic QSA, thus complementing the two sources (Figure 2). Macroeconomic data show financial and non-financial transactions and positions for the household sector. The time series start in 1999 and cover the last reference quarter with a lag of around three to four months. They follow the methodology of the European System of Accounts (ESA 2010). By contrast, HFCS data provide information on the distribution of wealth among euro area households.^[5] Four waves of the survey have been released, approximating to the years 2010, 2013, 2017 and 2021. These data are published with a lag of around 18 months.

The DWA leverage on the advantages of sector accounts and household survey data. Sector accounts are frequent, timely and exhaustive, but lack distributional information. Household surveys are rich in terms of distributional information but are impaired by infrequent updates, longer publication delays and incomplete wealth coverage. The DWA bridges these gaps by offering data consistent with national accounts, adhering to international standards, and providing quarterly updates with timely distributional insights akin to household surveys. Developed by experts from the ESCB, the DWA ensure harmonised compilation of country-level data and euro area aggregates.

Figure 2

Main DWA features: linking micro and macro data on wealth

The challenge for the DWA is to reconcile the HFCS and the QSA to the full extent possible, using the national accounts concepts and the aggregated results of the QSA as a benchmark. The methodology used to bridge household surveys and sector accounts consists of a series of steps. First, to cover as much common ground as possible between the HFCS and the QSA, a wealth concept specific to the DWA is defined and individual items from both the HFCS and the QSA are adjusted accordingly. At the euro area level, this common ground captures around 90% of household assets and liabilities as recorded in the wealth concept of the national accounts, while a few items (e.g. currency (cash), pension entitlements) are currently not included in the DWA owing to constraints in the availability of data. Work is currently under way to cover these items.^[6] Then, for each HFCS release, the QSA data closest in time are matched and the population scope in the HFCS is scaled up to match that of the QSA. Deposits, which tend to be considerably lower in the HFCS than those reported in the QSA, are adjusted at this point in order to accommodate some survey results identified as outliers. Furthermore, because households at the top of the wealth distribution (“rich households”) are difficult to capture in surveys, a crucial step in the DWA process involves estimating rich households that are under-represented in survey results. Any gaps still remaining between the HFCS, adjusted up to this point, and the QSA are allocated proportionately across households for each item in the wealth concept.^[7]

Quarterly DWA data are produced by interpolating and extrapolating information from the HFCS waves and combining it with aggregate quarterly changes in the components of wealth as reported in the QSA. The latest DWA quarters after the most recent HFCS wave are extrapolated under the assumption that the distribution of each individual instrument has remained stable. However, DWA distributions of net wealth change in the extrapolation period in line with the trends in the underlying QSA totals for the instruments and the holdings of different household groups. For example, strong increases in share prices will tend to shift the wealth distribution towards those household groups which typically hold shares as part of their financial investments. The DWA capture those effects.

Sensitivity analysis has shown that the DWA are sufficiently reliable for analytical and policy use while involving assumptions and estimates, meaning that data are labelled “experimental”. For example, assumptions are used for the distribution of deposits and calculation of time series. At the same time, additional information, generally based on media sources, is used when estimating the wealth of the richest households.^[8]

3 Key stylised facts in the DWA dataset

The distribution of household wealth is highly uneven, with rich households owning a large share of the total (Chart 1, panel a).^[9] In the euro area, for example, the wealthiest 10% of households hold 56% of net wealth, while the bottom 50% hold only 5%. The uneven distribution implies that, based on wealth, a large share of households that matter more for aggregate income, employment and consumption are under-represented and therefore may be less sensitive to wealth effects.

The bottom half of the distribution has witnessed a faster recovery in household net wealth following the losses during the sovereign debt crisis, leading to a decline in wealth concentration since around 2015. The bottom 50% of the net wealth distribution had experienced strong losses in net wealth during the sovereign debt crisis, as their higher indebtedness exacerbated the negative wealth effects induced by the housing market correction in several countries. Since around 2015, these households have been able to recoup losses at a faster pace, albeit from a much lower base, compared with the 40% just above the median and the wealthiest 10% (Chart 1, panel b). For the bottom half, the annual nominal growth rate of wealth consistently exceeded 4% over this period, before slowing down in recent quarters. Wealth accumulation for the bottom half was supported by relatively faster increases in the value of financial and housing assets − with the latter driven by house price appreciation − and by household deleveraging, thereby reducing debt burdens and strengthening balance sheets. Altogether, these developments have contributed to a slight decrease in the Gini coefficient for the euro area by around 1.5 percentage points since 2015 (Chart 1, panel c).^[10] Wealth inequality declined further in recent years in the context of the coronavirus (COVID-19) pandemic, the unanticipated surge in inflation and the subsequent monetary policy tightening (see also Sections 4 and 5).

Chart 1

Developments in euro area wealth distribution

a) Household net wealth by wealth group

(EUR trillions)

b) Nominal growth in net wealth and contributions

(annual percentage changes; percentage point contributions)

c) Gini coefficient: level and changes since 2015

(left chart: percentages; right chart: percentage point changes)

Across countries, differences in wealth inequality remain substantial.^[11] This reflects structural factors, such as aggregate homeownership rates, which are negatively correlated with inequality, as low homeownership rates tend to imply that a large share of households in the bottom half of the wealth distribution hold very low amounts of wealth.^[12] Consistent with this, inequality across the four largest euro area countries is higher in Germany and lower in Spain. Despite such structural differences, the Gini coefficient has remained broadly stable in France and Italy since 2015, while it has declined by relatively similar magnitudes in Germany and Spain. Wealth inequality remains lower in the euro area than in the United States, despite a visible decline in inequality on the other side of the Atlantic since the start of the pandemic (see Box 1).

The concentration of wealth varies both across instruments and over time, reflecting differences in preferences, in access to various asset classes and in credit and liquidity constraints. Concentration is particularly high for financial assets exposed to changes in value: around 80% of equities, investment fund shares and bond holdings are held by the top 10% wealthiest households (Chart 2). Business wealth exhibits similarly high concentration. Deposit holdings, housing wealth and liabilities (mortgages and other types of loan) are more evenly spread. Since 2015 there has been an increase in the concentration of housing wealth and mortgage debt, meaning a faster pace of accumulation – including through valuation effects – among wealthier households than poorer households. Moreover, relative holdings of debt securities and equity increased for the next 40% of households with wealth above the median.

Chart 2

Instrument concentration

(percentages of total outstanding amounts of each instrument)

The composition of net wealth also varies across wealth groups and changes over time. The bottom 50% hold a greater proportion of their wealth in bank deposits and housing, at around 25% and 63% respectively. The next 40% hold a similar share of both instruments together, but with a relatively lower weight for deposits and higher weight for housing (15% and 72% respectively). The shares of deposits and housing are smaller for the top 10% wealthiest households (10% and 50% respectively), as this group holds a larger share of business wealth and financial wealth other than deposits (Chart 3, panel a). Moving up the wealth distribution, the share of deposits declines while net wealth and riskier assets (equities, investment funds and bonds) increase, as wealthy households are able to bear more risk. Furthermore, household indebtedness declines going up the wealth distribution, as assets (e.g. housing) become less leveraged. Over time, a decline in borrowing by the bottom half of the wealth distribution (Chart 3, panel b) has helped to strengthen their balance sheets and increase their net wealth share in total assets, which has served to reduce inequality.

Chart 3

Composition of net wealth distribution

(percentages of group-specific net wealth; percentage point changes)

On the liabilities side, household leverage in the euro area has declined substantially for the bottom half of the wealth distribution over the past decade and has remained broadly unchanged for the top half. The deleveraging process over the past decade, supported mainly by the bottom half of the wealth distribution (Chart 4, panel a), was driven by an increase in assets alongside a decline in liabilities. Over recent years, with higher interest rates, deleveraging has continued, albeit at a slower pace, possibly indicating some use of household excess savings towards debt repayment or reduced borrowing. The reduction in leverage in the bottom half of the distribution has been driven mostly by economies which underwent strong housing market cycles, with significant price fluctuations and price corrections in the context of the global financial crisis and the euro area sovereign debt crisis (Chart 4, panel b). Nevertheless, leverage for the bottom 50% remains significantly higher than for wealthier households.

Chart 4

Leverage ratios across the wealth distribution in the euro area

a) Total debt-to-asset ratios across the wealth distribution

(percentages)

b) Mortgage debt-to-asset ratios for the bottom 50% of the wealth distribution

(percentages)

Box 1
Distributional Financial Accounts in the United States

Prepared by Alina-Gabriela Bobasu and Georgi Krustev

Similar to the Distributional Wealth Accounts (DWA) in the euro area, the US Federal Reserve System compiles the Distributional Financial Accounts (DFAs) for the United States. This dataset contains quarterly estimates of the distribution of US household wealth since 1989.^[13] Despite declining visibly over the last few years, wealth inequality remains significantly higher in the United States than in the euro area, with the top decile of the wealth distribution in the United States holding around two-thirds of total net wealth (Chart A).^[14]

Chart A

Concentration of net wealth in the euro area and the United States

(percentages)

In the United States, the wealth at the top of the distribution is largely held in business and financial assets, such as corporate equities, mutual fund shares and pensions, and less in housing than in the euro area. The bottom 50% of the wealth distribution hold their assets mainly in housing and are more leveraged than euro area households, including through liabilities other than mortgages (Chart B). The higher level of wealth concentration in the United States reflects multiple factors such as the degree of labour income inequality and movements in house prices relative to financial asset prices compared with Europe.^[15] Over the past two years, the bottom 50% of the wealth distribution have increased their wealth at a faster pace than the rest (around 6.9% average growth compared with 5% and 0.3% respectively for the next 40% and the top 10%), which has led to a more rapid decline in wealth inequality in the United States than in the euro area. This has mainly been driven by a faster accumulation of housing wealth by the bottom 50%, predominantly due to rising real estate prices and a lower accumulation of debt relative to the rest of the wealth distribution (Chart C). Nevertheless, financial wealth has also played a major role. The wealth of the top 10% declined following the start of the latest monetary policy tightening cycle in the United States in early 2022 driven primarily by equities and, to a lesser extent, pension holdings, which have only just started to increase again more recently (Chart C).^[16]

Chart B

United States: composition of net wealth

(percentages of group-specific net wealth; percentage point changes)

Chart C

United States: net wealth growth and contributions

(annual percentage changes; percentage point contributions)

4 Asset price fluctuations and the wealth distribution

Changes in asset prices affect household wealth differently across the wealth distribution, depending on the composition of wealth, with consequences for inequality. The impact of asset price changes on household wealth depends on the sensitivity of balance sheet instruments to market conditions and prevailing interest rates, and on households’ exposures to such instruments via their holdings of assets and liabilities. Developments in households’ holdings tend to be sluggish, as they do not rebalance strongly in response to asset price changes. Changes in household net wealth are primarily driven by gains and losses on holdings of real estate and equity which, in turn, follow house and stock prices very closely.

The effects of asset price changes on household balance sheets represent an important channel of monetary policy transmission. For instance, a decline in house prices, reflecting changing market conditions or monetary policy tightening, reduces the net wealth of existing homeowners and renders them poorer, as the value of their housing wealth falls while their liabilities remain the same. The associated negative wealth effects can prompt them to consume less and save more in order to rebuild their wealth.^[17]

Household wealth for the bottom 50% tends to be markedly more sensitive to changes in house prices than the wealth of the top 10%. The bottom half of the distribution, with higher housing-to-net-wealth ratios and more leveraged housing exposures, are significantly more sensitive to changes in house prices than to changes in prices for other assets (Chart 5). A simple indicator of this sensitivity is a leverage multiplier which measures the exposure to a particular asset class in relation to wealth. This indicator allows the mechanical effects of a hypothetical 10% increase in the prices of various asset classes on household net wealth to be traced, and to see how these effects change over time, while abstracting from indirect channels associated, for instance, with portfolio reallocation.^[18] A 10% house price appreciation increases the net wealth of households in the bottom 50% by more than 10%, on average. By contrast, the positive effect on wealth of such an increase amounts to around 5% for the top 10% wealthiest households, as they are less indebted and housing represents a smaller portion of their wealth. Housing exposures therefore tend to become smaller as wealth increases due to the effect of lower indebtedness in proportion to housing values (Chart 5, panel a).

At the same time, the effects of equity price changes are strongest at the top of the wealth distribution (Chart 5, panel b). This reflects the high concentration of this type of asset among the wealthy. Consequently, while rising house prices would tend, in isolation, to reduce inequality by disproportionately benefiting the less wealthy, the opposite effect is observed with rising equity prices.

Chart 5

Net wealth changes across the wealth distribution from a 10% rise in asset prices

a) Net wealth gains from a 10% rise in house prices

(percentages of net wealth)

b) Net wealth gains from a 10% rise in equity prices

(percentages of net wealth)

Nevertheless, the share of housing in net wealth has decreased over time as the less wealthy have consolidated their balance sheets. Deleveraging over the past decade has caused the share of housing in net wealth at the bottom of the wealth distribution to decline. This may have important implications for monetary policy transmission via asset prices in a context of rising policy rates, as less wealthy households may have become more resilient to housing market corrections compared with the global financial crisis and euro area sovereign debt crisis.

While homeowners in the bottom half of the distribution have benefited more from higher house prices, this wealth group refrained from house purchases as affordability worsened. Chart 6 shows that, considered in isolation, positive housing wealth revaluations (i.e. driven by higher house prices which gradually increased the market value of homes) from 2015 on have disproportionately benefited net wealth at the bottom half of the distribution.^[19] Consequently, rising house prices have contributed to the observed decline in wealth inequality since 2015. At the same time, housing transactions have partly reversed that effect by working in the opposite direction as the bottom 50% reduced their housing assets while the rich accumulated more.^[20] This may reflect the distributional consequences of rebalancing, as the rising house prices reduced home affordability for the less wealthy. This conclusion is supported by evidence of declining homeownership rates and correspondingly higher rental rates among the less wealthy over the past decade in countries such as Spain which have seen substantial housing adjustments.^[21] The adjustment appears to have had a greater impact on younger cohorts that also reduced their indebtedness and homeownership during the crisis periods to levels closer to the euro area average.^[22]

Chart 6

Cumulative effects of transactions and revaluations on net wealth across the wealth distribution

(cumulative percentage changes in net wealth since Q1 2009; percentage point contributions)

5 Impact of inflation and monetary policy on wealth distribution

The composition of assets and liabilities across the wealth distribution determines the extent to which high inflation affects wealth inequality. Unanticipated inflation may lead to a drop in wealth inequality by redistributing wealth from lenders to borrowers through changes in the real value of nominal assets and liabilities. This is known as the Fisher channel.^[23] Nevertheless, the Fisher channel only works fully if income adjusts to inflation, thereby reducing the burden of payments from indebted households, which are usually those at the bottom of the wealth distribution. The Fisher channel is weakened when higher unexpected inflation reduces the real interest income of low and medium-income households and increases the profit income of high-income households.^[24]

The effects of an inflation shock on the wealth distribution can be assessed by decomposing changes in real net wealth into contributions from transactions, real asset revaluations and erosion due to inflation.^[25] The assessment quantifies the effect on real net wealth stemming from the nominal erosion of its components (which is negative for nominal assets and positive for nominal liabilities) over the high-inflation period since mid-2021 across the wealth distribution. It does so by reproducing the ex-post decomposition in the cumulative change in net wealth between two points in time − end-of-sample (fourth quarter of 2023) − relative to the surge in inflation starting in the second quarter of 2021 − into three components: the transactions component, the developments in real asset prices and the erosion (due to inflation) component. The first and second components are similar to those shown in Chart 6; they trace the effects of savings and revaluations on wealth accumulation (albeit in real terms). The third component quantifies the erosion by inflation of the real value of assets and liabilities, with reimbursements set in advance in nominal terms (deposits and debt).

Real net wealth has declined across the wealth distribution since mid-2021, but higher inflation has tempered losses for poorer households by eroding their liabilities more than their deposits, while also amplifying losses for wealthier households (Chart 7). The effect reflects distributional differences in net nominal positions in assets and liabilities whose reimbursement value is set in nominal terms, in addition to the heterogeneity in net savings which are captured by the transaction component. Poorer households, as a group, hold lower deposits than debt. This implies that inflation will erode a higher share of their liabilities than their assets exposed to inflation (i.e. deposits), while the opposite occurs for wealthier households. This effect captures only the wealth redistribution from savers to borrowers, working mechanically through balance sheet positions, and ignores other effects such as flows of interest income and debt repayments, as well as differences within wealth groups given that only a given share of households holds any debt.^[26] Going up in the wealth distribution, real wealth losses have increased over the last two and a half years, despite stronger contributions to net wealth from savings and less limited losses from falling real house prices. This result is mostly attributable to revaluations of financial assets other than deposits (such as shares and bonds) and business wealth, which have experienced larger real losses amid rising interest rates.

Chart 7

Changes in real net wealth since Q2 2021 and contributions

(cumulative percentage changes; percentage point contributions)

Turning to the effects of monetary policy, changes in the wealth distribution across households can occur mainly through two channels. The first channel involves asset prices, as the size and compositions of holdings in the euro area imply that some households hold more long-term assets and are, therefore, more affected by (asset) price movements related to the monetary policy stance, as also documented in Section 4.^[27] The second channel relates to savings remuneration and the cost of debt, as a shift in interest rates will have contrasting effects on the wealth of net borrowers as opposed to net savers. While there is some agreement on the effects of monetary policy on the income distribution, the distributional impacts on wealth are less clear and the findings are rather mixed. In this sense, some of the available analyses suggest overall limited effects on the wealth distribution, while other studies indicate increasing wealth inequality due to expansionary unconventional monetary policy.^{[28] [29]}

Empirical evidence points to dampening effects of monetary policy tightening across the wealth distribution. Changes in asset prices have a direct impact on household balance sheets.^[30] Following the start of monetary policy tightening, equity prices initially declined in the first three quarters of 2022 but subsequently rebounded strongly, while house prices, which usually exhibit lower volatility, only began declining more visibly later in response to higher interest rates, although the total decline remained modest for the euro area as a whole amidst heterogeneous developments across countries. A linear panel local projections framework is used to assess the impact of monetary policy tightening on the wealth distribution, with a focus on the housing and financial wealth channels.^[31] Empirical estimates point to a dampening effect of monetary policy tightening which is heterogenous across the wealth distribution.^[32] Overall, all household groups lose in terms of their net wealth (Chart 8, panel a). While the bottom 50% lose mainly via housing wealth due to lower house prices, the next 40%, and especially the top 10%, lose primarily via financial wealth channels, with the housing channel playing a more limited role. Nevertheless, for the latter group, net wealth tends to recover quicker in line with equity prices rebounding faster than house prices (Chart 8, panel b), despite a relatively larger initial fall following the monetary policy shock. Overall, the monetary policy tightening seems to have a dampening effect across the wealth distribution, with the housing channel playing a relatively stronger role for the less wealthy, while the financial channels seem more important for the wealthiest households.^[33]

Chart 8

Effects of monetary policy

a) Impact on net wealth of monetary policy tightening

(percentages)

b) Impact on net wealth of monetary policy tightening

(percentages)

6 Conclusions

This article introduces the newly available DWA, providing evidence on heterogeneity in the wealth levels of households. Wealth concentration in the euro area declined between 2015 and 2023, as the wealth of the 50% less wealthy households rebounded faster than for the top 10%, albeit from relatively lower levels. Wealth accumulation for the bottom half was supported by relatively faster increases in the value of financial and housing assets and by household deleveraging that reduced debt burdens and strengthened balance sheets. Wealth inequality in the euro area remains significantly lower than in the United States. Higher house prices may have reduced inequality in the euro area as a whole since 2015 by, in relative terms, predominantly benefiting the bottom half of the wealth distribution, amidst cross-country heterogeneity. This has more than offset the impact from housing transactions, which likely had the opposite effect, as the bottom 50% have reduced their housing assets while the wealthy have accumulated more.

This article also makes use of the DWA to assess the impact of the recent surge in inflation and subsequent monetary policy tightening on the distribution of wealth. The analysis finds that, in relative terms, poorer households’ balance sheets have been affected less by the recent surge in inflation. This is because, in real terms, their liabilities have been eroded more, given the balance between outstanding deposits and debt. At the same time, wealthier households have been affected more by the amplified losses in real net wealth due to revaluations of financial asset prices in real terms, as nominal valuation changes for different financial asset classes have not kept up with inflation. Both groups are assessed to have most likely experienced nominal net wealth losses as a result of monetary policy tightening. While the bottom 50% are likely to have experienced losses in housing wealth due to lower house prices in the euro area as a whole, for the next 40%, and especially the top 10%, such losses are likely to have occurred primarily through financial wealth channels, with housing playing a more limited role.