Real Estate: Higher Interest Rates Cause Prices to Nearly Stagnate – Rents Rise

Higher interest rates have cooled Germany’s housing market. In the third quarter, condominium prices rose only 0.3% from a year earlier. Prices for detached and semi-detached houses increased 0.4%. The IW describes purchase prices as broadly stagnant since 2023. Compared with their 2022 high, they are more than 10% lower.

Rents followed a different path. They increased 4.5% nationwide in the third quarter compared with the same period last year. Hamburg recorded the strongest quarterly increase, at 6.8%. Higher borrowing costs make buying less affordable, so some households that might have purchased instead look for rental homes. That extra rental demand can push rents upward.

The market is therefore split. Buying has become less attractive and construction is also weakening because interest and building costs are high. The IW expects rents to keep rising because expensive construction is likely to limit new housing. Berlin recorded the largest rent increase since 2022, at 29.5%, while Stuttgart recorded the smallest, at 16.7%.

An interest rate is the percentage a lender charges for providing money. For a homebuyer, it is part of the mortgage cost, alongside repayment of the borrowed amount. When the rate rises, the same loan usually requires a larger monthly payment or supports a smaller purchase budget. This makes buying a home more expensive.

The article gives a concrete example. With a €300,000 loan and a 2% repayment rate, households now pay about €1,600 each month. At the beginning of the year, the monthly burden was about €1,450. That is an increase of roughly 10%. The key mechanism is higher financing cost: more household income goes toward the loan, leaving less room for the purchase price.

Higher rates also reduce demand for homes people want to buy. The IW links the rate increase to inflation expectations and concerns about government debt. Weaker demand helps explain why German purchase prices have largely stagnated since 2023, even as rents continue to rise.

The scale of the change differs sharply between buying and renting. The IW reports that German purchase prices are more than 10% below their highest level in 2022. Since 2023, they have moved largely sideways rather than continuing to fall sharply. In the latest comparison, condominium prices rose 0.3%, and detached or semi-detached houses rose 0.4%.

Rents moved much faster. Nationwide rents increased 4.5% in the third quarter compared with the same quarter a year earlier. Hamburg had the strongest quarterly increase among the named cities, at 6.8%. Since 2022, Berlin had the largest rise, with rents up 29.5%. Stuttgart had the smallest increase among the figures given, at 16.7%.

These figures describe two connected pressures. Higher mortgage costs discourage purchases, while the resulting rental demand supports rent increases. At the same time, high construction costs limit new housing. The IW therefore expects no immediate relief in rents and predicts that weaker construction may push them higher.

When mortgage payments become more expensive, fewer households can afford or choose to buy a home. Some may postpone a purchase, while others can only consider a cheaper property. In both cases, the number of households actively bidding for purchase homes falls. This is the demand effect described by the IW.

The article illustrates the pressure with a €300,000 loan. At a 2% repayment rate, monthly payments have risen from about €1,450 at the beginning of the year to around €1,600. The increase is roughly 10%. Higher financing costs mean households must devote more money to the same home, so they may reduce their offer or leave the market.

With weaker demand, sellers face less upward pressure on prices. The IW says German purchase prices have moved largely sideways since 2023. In the third quarter, condominium prices rose just 0.3% year on year, while houses rose 0.4%. Regional results varied, but the national pattern was near stagnation.

A household that cannot comfortably finance a purchase still needs somewhere to live. If higher interest rates make a mortgage unaffordable, renting becomes the practical alternative. This shifts some households from the purchase market into the rental market. More people seeking rental homes can increase competition for available properties.

The article identifies this mechanism directly. The IW says high interest rates steer financially capable households into the rental market. At the same time, expensive construction is slowing the creation of new homes. Demand therefore rises while the supply of rental housing does not expand quickly enough. That combination supports higher rents.

The result is a clear contrast in the latest figures. German purchase prices were almost unchanged, rising 0.3% for condominiums and 0.4% for houses. Nationwide rents rose 4.5%. The IW expects no immediate relaxation because higher building costs are likely to keep new construction weak and continue driving rents upward.

New construction becomes harder when both financing and building expenses rise. Higher interest rates make it more expensive to fund projects and can reduce demand from buyers. Higher construction costs also make new homes more costly to produce. The IW says these pressures are worsening Germany’s housing construction crisis.

Energy prices are currently the main force behind higher construction costs, according to the article. The study authors say interest rates and building costs are rising at the same time. For households, a €300,000 loan with 2% repayment now requires about €1,600 monthly, compared with €1,450 at the beginning of the year. This weakens buying power and makes projects more difficult to sell.

The IW predicts that the number of newly built apartments will continue to decline. That matters beyond construction companies and buyers. Fewer new homes mean less additional housing supply. The institute expects this shortage pressure to keep rents rising, since rental demand is already strengthened by households priced out of purchasing.

Housing prices and rents reflect the balance between supply and demand. Demand means how many households want to buy or rent. Supply means how many homes are available. When demand exceeds supply, households compete more strongly, putting upward pressure on prices and rents. When demand weakens, sellers may have to accept slower growth or lower prices.

Germany currently shows both patterns. Higher mortgage costs reduce demand for homes offered for purchase, so purchase prices have largely stagnated since 2023. At the same time, households unable to buy move into the rental market. If new housing does not increase enough to meet that demand, rents can rise. The article reports a 4.5% nationwide rent increase in the latest year.

Construction affects the longer-term balance. The IW expects fewer new apartments because interest rates and building costs are high, with energy prices driving costs. Reduced construction limits future supply. The institute therefore expects continued rent pressure, while purchase prices may remain subdued as financing stays expensive.